Column: “Three Wise Men Came To Bermuda”

[Opinion column written by Larry Burchall]

As Christmas approaches, we recall the story of the three wise men. In late November, Three Wise Men came to Bermuda.

They were the Three Wise Men of the Fiscal Responsibility Panel. Unlike those three wise men of old, our Three Wise Men [TWM] had only one offering. Also unlike the biblical three, our TWM were – I gather – rather handsomely rewarded.

Times change.

Five days after the TWM’s first annual assessment was handed to the Government, one of the two ‘downside risks’ prophesied by the IMF, and referred to by the TWM, came to pass.

The TWM wrote: “… of greater concern are the key downside risks identified by the IMF.” One risk was: “The likelihood of a rise in US interest rates….”

On Wednesday 16th December 2015, Janet Yellen, Chairman of the US Federal Reserve, announced that the Fed’s interest rate would rise from 0.000% to 0.0025% or, in ‘Fed-speak’, by ‘25 basis points’.

With that, a ‘downside risk’ was no longer a risk. It became a fact. It happened. The ‘Fed’ and the US financial pundits also suggest that Fed rates may rise as high as 1.375% by the end of 2016.

What does that mean to the Government of Bermuda, and to you [and me] – the real people who ultimately pay all the bills?

It means that by the end of 2016, all of Bermuda’s re-financed foreign borrowings can cost up to 1.375% more than now.

What does that mean?

It means that in July 2017, when the Government MUST refinance the $200 million Butterfield Bank Loan Facility, the Government can expect the refinance rate to be the existing 4.75% PLUS 1.375% [or more…]. That means a new and higher rate of at least 6.125%.

That means that the $200 million currently costing Government a total of $9,500,000 could see costs rise by $2,750,000 hitting the new total $12,250,000. A whopping increase!

By October 2019, the Government must repay $180 million in foreign loans. Currently $100 million of that is at 7.38% interest, costing $7,380,000 a year. On refinancing – which is absolutely unavoidable – that would rise by $1,375,000 to $8,755,000 a year. The other $80 million is currently at 5.93% costing $4,744,000 a year. That would rise by $1,100,000 going up to $5,844,000 a year.

The current cost of that $200m + $180m is $21,624,000 a year. By October 2019, that cost will have escalated to $26,849,000 – an overall increase of $5,225,000 a year.

Then, in 2020 and going forward, we face a total of $1,915,000,000 [that’s billions], ALL of which will have to be re-financed.

A mere 1.375% increase on current rates for that $1.915 billion adds another $26,331,250 to the total annual cost of feeding Nanci.

When the TWM delivered this first annual assessment, they saw interest rate rises as possible future ‘downside risks’. Rises are no longer risks. Rises are happening. Now.

With at least $2,295,000,000 [that’s billions] of current and existing national debt that requires re-financing, Bermuda faces the spectre of seeing the current total interest cost of $116,096,500 rise by $31,556,250 for a new annual interest cost of at least $147,652,750.

To that $147,652,750 of annual interest we must add $52,375,000 for the Sinking Fund which, the TWM correctly point out, must always be factored in. So starting in 2017, Bermuda can expect the cost of feeding Nanci to rise to $200,027,750 a year. Right now, in December 2015, it is $169,900,000 a year.

All of that is true only if Bermuda does not borrow even one more penny from anyone at all.

If the Government does not break its now twelve year bad habit of overspending, then Government’s Nanci feeding costs will rise. Clearly, as the TWM hint, they could go much higher. $230 million a year by 2024?

The TWM clearly saw the distinct possibility of all of this. They acknowledged it when, in their first conclusion, they wrote: “Bermuda’s economy faces a number of risks and uncertainties…… the current level of government debt … risks turning the impact of any one of these into a serious setback for the Island’s economy.”

Janet Yellen’s ‘25 basis points’ decision has turned a risk into a certainty.

Perhaps, on the cusp of a ‘setback’, we’ll pay attention to the Three Wise Men.

- Larry Burchall

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