Govt's $500m bonds sale pushes us deeper into debt

To cover its past sins and mistakes, Government is selling $500 million of Bermuda bonds. It means Government will stay with a $60,000,000 overdraft facility, rollover the $200 million due on June 17 and consolidate the still outstanding balance of $1,101 million national debt into this $500 million sovereign bond issue.

Bermuda’s full new $1 billion national debt breakdown is revealed in the sidebar. Bermuda’s national debt is now what it is. Three core questions:

• How did Bermuda go from $277 million total debt on March 31, 2008, to this four times higher total?
• What will happen now?
• How will Bermuda move on?

How did it happen? Discounting the $211 million in Guarantees, Bermuda added $613 million in debt in just three years.

This is an average of more than $200 million overspent every year for three years in succession.

It is a $500,000 mistake repeated every day for 1,200 days in succession.  

Debt growth of this style and mistakes of this magnitude are manager faults.

Given Constitutional and legal authority and Parliamentary responsibilities, who messed up? 

The top trio of money managers is the Minister of Finance, the Financial Secretary and the Economic Advisor (the consultant Dr. Andrew Brimmer).

These three top kicks join with the lowlier accounting technicians in the Ministry of Finance who are responsible for providing timely and accurate financial information.

Parliament has ultimate responsibility for all spending matters. These, then, are the people responsible.

High above all this, filling the air like the volcanic ash cloud that knocked all those aircraft out of the sky, there floats this singular fact — there has been a massive systems failure among all of Government’s senior money managers.  

Bermuda’s overdraft crisis — I call it ‘Operation Desperation’ — reveals part of the tale.  

The overdraft rocketed from its first-time ever, start and opening level of $11.5 million on March 31, 2008, to its 18 times (1,800 per cent) higher peak of $207.5 million on March 31, 2009, then settled to the last reported level of $100 million on March 31, 2010.

Embarrassing

This well-concealed 24-month desperate and frenetic scramble for cash was the result of a combination of past bad decisions, past bad money management and the need to keep Government running without an embarrassing public revelation of how terrible things really had become.

The overdraft crisis — ‘Operation Desperation’ — happened because Government spending continued rising even though Government revenues were actually falling (see graph).

Government money managers messed up badly. They made this huge $613,000,000 strategic blooper. The biggest bundle of mistakes occurred during the period between March 31, 2007, and March 31, 2010 (See chart).

The consequences of the mistakes first became apparent during early 2008 but no manager or managers took control. So the blooper mushroomed.

The blooper itself? Not properly monitoring and reporting Government revenue and not properly monitoring and controlling Government spending.

Bad financial management will drive any well-to-do family into poverty. It will force any successful business into bankruptcy.

It will push any wealthy and socially stable nation into relative poverty and social instability.

What will happen now? This financial mismanagement has a consequence.

Bermuda is now loaded with new and high debt service charges.

In 2007, with debt at $197 million, total national debt service charges stood at $18 million. 

This year, total national debt service will rise 290 per cent to more than $70 million.

Next year, with no accounting ‘tricks’, total debt service will stabilize around $73 million.

The new debt service level will be about $55 million higher than before.

This new and higher service level is the equivalent of Government adding about 800 additional civil servants or two more Government departments, such as the Cabinet Office ($23.5 million) and the Ministry of Energy, Telecommunications and E-Commerce ($32.9 million).

The higher level means $1.50 spent on debt service for every $1 spent on tourism and causes a radical shift in national priorities.

Next year, in 2011, this larger and unavoidable Government expense will require even higher Government revenue.

Choked

This means higher taxes.  Higher taxes will further flatten Bermuda’s already flattening economy and cause more job losses.

With a further flattened economy, more job losses and new taxes, Bermuda’s economy will be choked even tighter.

This will force Government to do one of three things — bring its just risen expenses down to match its real revenue, raise taxes or borrow yet more dollars (and still end up raising taxes). Bermuda’s current crop of money mis-managers is unlikely to reduce Government expenditure.

This leaves today’s national debt acting like a blood clot in an artery. It can have the same effect on our national economy as a clot can have on a human.

How do we get out? Two options. Stay with the current crop of money

mis-managers and — with continuing job losses — get badly hurt as things slowly get worse.

Or we get new and better money managers and start working our way out. However, recovery will only commence after Government begins a real cutback.

Best option? Get new managers now because recovery will require three to five years of consistently good money management.

Financial woes: The graph and table show how Government revenue, spending and national debt has increased in the last decade. Bermuda's overdraft has increased by a staggering 1,800 per cent to $1,101.5 million in 2010/11, more than the total revenue figure of $1,058.3 million. Total spending for this period is $1,134.7 million. * Graph supplied