Government is now trapped in a debt vice

The government over-grew, over-spent, and over-borrowed. Now under-handedness has been added.

The consequences of this combination of bad actions will be that Bermuda will suffer a prolonged economic recession.

The recession will happen because government expenditure on Civil Service pay and on the delivery of government services such as Financial Assistance, health care, and so on... will continue to decline (see my June 30 column).

Government expenditure will decline because government must first shave a few cents off every U.S. dollar that it takes in — before that dollar is re-spent.

Government will try to get around this shaving-off of cents by increasing taxes. But, carried too far, tax increases stifle business and cause employment to contract, thereby shrinking the tax pool. The employment shrinkage happens because, in order to stay profitable, companies must shed labour, which is what BTC has done.

Of course, the only government response to employment shrinkage is — you guessed it! — increase taxes!

This government, with this Finance Minister in charge, is now well down this road of tax increasing and reducing spending.

Because this government spends more than it receives, it is forced to borrow cash from overseas lenders. This borrowed cash is coming at an ever-increasing expense. To meet this ever-increasing expense, this government is — you guessed it! — increasing taxes. Then it is cutting expenditure on services, with this cutting both inevitable and consequential.

Because of past and continuing bad financial and economic management, this government is now trapped in a debt vice. Keep this Minister and the vice will tighten. We will see and feel the consequences as we find ourselves paying increased taxes and fees; and as we notice that spending on government services is declining.

All of us will see and feel that.  

In the midst of all this inevitability and lining up of consequences, there is also this thread of under-handedness.

A year ago, between 21 May and 30 June 2009, the Minister for Finance went to the overseas capital markets and borrowed $175,000,000.  

Between  April 2009 and now, the Minister never made a Ministerial Statement that showed that she had actually raised that money. 

In a Ministerial Statement in December 2009, the Minister did say that “…net Public Debt increased by $204.9 million (2008 - $80.5 million) during fiscal 2008/09, standing at $483.3 million at the end of the year.” 

But she never explained how she had financed that $204.9 million. The Minister has never told us or explained why the interest rates were as much as two percentage points higher than rates charged in 2005 for similar duration loans.

Funding gap

Anyone reading and analyzing the February 2010 Budget Statement — as I did — would see that the February 2010 Statement showed a ‘funding gap’ of about $383,464,000 between what the Ministry shows and what the Minister tells.

Ministry papers show $210.8 million in paper Guarantees (BNTB, Education, WEDCO);  $415 million in Senior Notes and Loan Facilities; and $175 million in Senior Notes taken up in May/June 2009. Put all the ‘notes’ together, add the Guarantees, and then take away the $82.8 million in the Sinking Fund;  you end up with $718 million in identified Debt.  

But the Minister tells of $1,101.4 million as Debt. That leaves $383.4 million not accounted for by way of Notes or other stated loan facilities.  

Even as I write and you read, this naked $383.4 million sits with HSBC (Bermuda)  as ‘unsecured loans’ or overdrafts or bridging loans or cash advances that are not showing up — have not yet shown up — in any Government Financial Statements; or in any Ministerial Statements. At the minimum, the Minister has to issue Sovereign Bonds to cover this naked $383.4 million ‘cash gap’ (see below).

Every failure to properly account for funds is bad. In the corporate world, it inevitably leads to business failure. In the investing world, it allows people like Bernie Madoff, Allen Stanford, Dennis Kozlowski to steal; allows firms like ENRON to hide; and firms like TYCO to be defrauded.

So here we are. Bermuda has a Finance Minister who has been largely silent on primary matters of public accounting, national debt, and recent or planned large borrowings, for more than a whole year.

A Finance Minister who, as demonstrated by her continuing silence, has taken a ‘keep quiet’ approach to financial management.

Keep silent. Say nothing about money. When questioners get too close, distract with stuff about overseas conferences, TIEAs, small business development... 

Meanwhile, keep looking calm and cool. 

This Minister may believe that silence is her best defence. But doesn’t this Minister know that not even silence stops the arithmetic of numbers?

• 2005 Notes at average 5.6% Interest: $215,000,000 (Cash)
• Loan Facility - LIBOR - 1.5% Interest: $200,000,000 (Cash)
• 2009 Notes at average 7.07% Interest: $175,000,000 (Cash)

Total  (gross) Cash borrowed supported by paper: $590,000,000 (Cash)

LESS Sinking Fund: $82,810,000 (Cash)

Total (net) Cash borrowed supported by paper: $507,190,000 (Cash)

• Guarantee – BNTB: $200,000,000 (non-cash)
• Guarantee – WEDCO: $10,000,000 (non-cash)
• Guarantee – Educational loans: $800,000 (non-cash)

Net Total of all Notes and Guarantees: $717,990,000

• Budget Statement of National Debt (Page 34): $1,101,454,000

Debt not yet covered (naked debt): $383,464,000 (naked cash)