Bermudians will be stung hard by crippling Gov't debt

Bermudians are about to get stung — and stung hard. Tomorrow, Finance Minister Paula Cox must rollover, pay off or default on the $200,000,000 five-year loan facility taken up on June 17, 2005.

The Minister will neither default nor pay off. Because she does not have the funds, she will - negotiate an extension of that loan.

So on June 17, 2010, Bermuda’s national debt will be laid out (see the second column of the table).

But Bermuda’s debt will need further sorting out.

Neither HSBC nor the Bermuda Government should be operating with a $100,000,000 overdraft.

This overdraft — a consequence of bad money management in Government — is a high-risk matter for HSBC.

In addition, it shows the kind of private bank and public government inter- facing that is a harbinger of a kind of financial unsavouriness that often attracts the attention of financial oversight and regulatory agencies.

Before June 30, Minister Cox will sign off on a sovereign bond issue and Bermuda will add a brand new layer of national debt Government costs.

The new debt will be laid out like the numbers shown in the third column of the sidebar.

Mis-management

The numbers are what they are. What is critically important is how we got here and what will happen now and next? How did we get stung like this?

It happened due to a combination of bad management, mis-management and bad leadership that was operating in relative concealment.

Bad management is demonstrated by the fact that public debt grew from $119.5 million in 2004 to today’s reported $1,101.4 million.

Some $981.9 million was added in seven years.

Debt growth was fastest between 2006 and 2010 when $904 million — 92 per cent of all this newly added debt — was taken on in just those five years.

The concealment is reflected in the acquisition, in May and June 2009, of some $175,000,000 in additional debt.

This debt was created at the height of 2009’s ‘Operation Desperation’.

It was incurred without any material notice to the tax-paying public.

Tangled up with the concealment of this new debt is a small but alarming fact.

Outside investors have begun demanding higher rates of interest.

The $75 million and $140 million notes taken up in 2005 came at 5.39 and 5.73 per cent interest.

Four years later, the May and June 2009 series of senior notes came in higher at 6.55 per cent, 6.98 per cent and 7.38 per cent (see table for amounts and maturity details).

The interest rate increase is a bad sign. It means outside investors are concerned about the risk.

What now will happen if Minister Cox goes for a $500 million sovereign bond issue? And she will go for $500 million because it gives her a $106 million temporary ‘cash’ surplus, which she will need.

Two things. First, Bermuda will get stung with higher interest rates.

Astute foreign investors have already seen what I have tried to show you.

They will have made their assessments and determined their risks.

Based on that, they will set their interest rates for Bermuda bonds.

Based on the 2009 senior notes issue, those rates are likely to be greater than seven per cent.

They could be greater than eight per cent. That will be damned costly to us taxpayers.

Secondly, with the $500 million bond issue in place, Bermuda will find itself facing the situation where it will have to pay $91,000,000 in full debt service cost.

Some $79 million will become due in this fiscal year. All $91 million of it will be shown as debt service in 2011/12.

At $91 million annual debt service cost, Minister Cox will be allocating more cash to debt service than to the combined Police, Fire Service and Judicial Department.

Looked at another way, that $91 million annual interest payout will mean spending $2.38 on debt service for every $1 spent on tourism.

Compare that with 2004 when we spent $0.23 on debt service for every $1 we spent on tourism.

Debt service alone will now cost more than $249,000 per day. In Minister Eugene Cox’s time, debt service had fallen to less than $25,000 per day.

Bloopers

The biggest, and yet-to-come, sting? In the next financial year (2011/12), whoever is Finance Minister will have to again increase taxes and cut Government expenditure.

Even after doing both, Government will still have to borrow more millions.

This will take total borrowing past the teeny-weeny $32 million balance currently separating the sneakily increased $1,217,990,000 that we will shortly show from the $1,250,000,000 borrowing limit that present legislation allows (see the last column in the table).

This tale of financial bungles, bloopers and blunders must end now.

If it does not, Bermuda will quickly fall into the lap of the IMF — our houses and dollar will lose their value, tight currency controls will be reintroduced and real unemployment will come to us. Bermuda needs to rid itself of the Finance Minister, get a new team in place at the Ministry of Finance and have a Government that operates in the open and at a far higher standard of fiscal performance. Change. Change now.

Notes and explanations
1. If the guarantees must be made good, then the total amount of ‘cash’ borrowed will have to be further increased by the amount of the guarantees. In June 2010, the minumum net borrow required is $384 million. Fees/commissions take this up to $390 million. A $500 million bond will provide $106 million ‘cash’ surplus.
2. A ‘cash’ surplus is necessary because Government revenue projections are likely to be too high and there will be a consequential need to cover the resulting deficit.