OBA: Rating blow undermines Government's credibility

WEDNESDAY, JUNE 27: Yesterday, Fitch ratings passed judgment on Bermuda’s economic prospects.

In short, the agency did not like what it saw.

It downgraded the Island’s credit rating, meaning it now sees Bermuda as a riskier proposition.

What was particularly disturbing about the Fitch report were the comments it made about the Government’s management of the public purse.

Fitch expressed little confidence in its ability to manage Bermuda’s finances.

It also cast doubt on the Government’s credibility – citing lack of discipline and noting its failure to accurately estimate the size of its deficit.

And Fitch issued a thinly veiled warning to Bermuda – that without a more disciplined approach to the island’s finances, without a plan to reduce Government’s huge and growing debt, and without a plan to close its mounting deficit, further negative judgment would follow.

Make no mistake Bermuda, this was a damning report.

And, even in the arcane language of high finance, it left no doubt that it saw the Government of Bermuda as the number one problem in its assessment of the island.

Before I address some of the issues raised by Fitch in more detail, I would like to make the following point:

Some of Fitch’s comments are so in line with our on-the-record positions, they could have been made by the One Bermuda Alliance.

But they were not. They have been written by an impartial agency.

For example, “The downgrade of Bermuda’s rating reflects the .... lack of a credible fiscal consolidation strategy.”  The credibility of Government’s control over its expenses is in doubt. In fact the word “credible” or “credibility” appears three times in a page and a half. Credibility is the lifeblood of finance and this downgrade is due to a credibility gap with respect to Bermuda’s government.

Fitch also says: “Resumption of economic growth and concrete signs of fiscal consolidation and debt stabilization would help to sustain Bermuda’s ratings.”

This is exactly what the OBA has been telling Bermuda what must be done: the simultaneous twin paths of pro-growth policies plus cutting wasteful government spending are the only ways to stabilize and reduce debt.

The government has continuously tried to convince Bermudians that the problems are due to the global recession. This Fitch report explodes this myth by observing that “Bermuda’s debt/revenue ratio at 150% in 2011 is above the AA’ median, and is deteriorating faster than its peers.”

If all our problems are the result of the global recession why is our debt situation deteriorating faster than our peers? It’s because our debt problems have “Made in Bermuda” stamped all over them.

We have made the point numerous times that justifying higher Government debt by comparing Bermuda’s debt ratios to larger countries is misleading because our economy lacks their diversification.

Fitch confirms this long-held OBA position by saying that Bermuda’s credit strengths (that the Premier quoted) ... “are counterbalanced by Bermuda’s lack of economic diversification, weaker growth prospects and limited policy flexibility.”

The Government has been misleading itself and Bermudians on this very important point for years. And it is this kind of misleading argument that is sleep-walking this Government and all of Bermuda into a deeper and deeper financial hole - a hole that will take decades to climb out of.

Fitch’s final judgment on the Government’s management of the economy reads as follows:

“Recurrent changes to the debt ceiling, withdrawals from the sinking fund to meet interest payments and the inability to implement a multi-year budget program have undermined the credibility of the fiscal policy anchor and the commitment to fiscal consolidation.”

Again, this is a damning judgment on the Government’s financial stewardship.

Bermuda, we must have more responsible leadership on the economy.

But this Government shows no sign of doing that.

Just look at the way the Premier/Finance Minister is spinning Fitch’s findings.

In a press release, the Premier says that the downgrade is the same rating as Bermuda had from 1994-2006. The problem here is that in 1994 Bermuda owed less than $160 million. With this latest borrowing the Government will owe about $1.45 billion, already reaching the legal limit it raised just a few months ago.

The cost of this downgrade on that amount of debt is staggering compared to the minuscule amounts in the years the Premier mentioned. In fact, despite Fitch’s wake up call, the Premier and her Government show they are still asleep, gently drifting on the river of denial.

Let us also remember that this bond issue is to be used for current expenses: keeping the lights on, paying salaries, servicing the debt etc.

As for the nonsense Government spouts about using the money to build infrastructure, this is not borne out by the facts. The fact is that no more than $500 million has been used for capital spending – which leaves nearly a billion dollars not spent on infrastructure.

Even if this were true, what kind of manager would blow all his cash on infrastructure and then have to borrow money to keep the lights on? This debt is the result of financial mismanagement. Investors now know it from the Fitch report and so do Bermudians.

Fitch sees little possibility of future economic growth for Bermuda. Why is that?

Consider what the Bermuda Government intends to use the money for. As pointed out in the document prepared for the bond issue, the use of the monies is not for Bermuda growth opportunities, but to pay off existing loans and keep the lights on. Therefore, the bond issue will provide no additional boost to the economy and the lives of local Bermudians.

So how does this help the local Bermudian?

Bermudian’s tax money ultimately backs Bermuda government bonds and therefore taxpayers are the ultimate guarantor of these bonds. As the new money is not going towards growth opportunities, Bermudians will have no way to earn more than the cost of this bond issue, which is expected to be about 4 per cent. Therefore, the Bermuda government will be locking in a national loss and Bermudians can expect to pay for that loss. 

Not surprisingly, all of this has a cost. Before the downgrade, existing Bermuda Government bonds yielded 3.81 per cent. After the downgrade the new issue yield was 4.138 per cent, an increase of 0.33 per cent. With the issue size of $475 million, the cost of the downgrade to Bermuda taxpayers was $15.5 million.

In addition, the cost of money for Bermuda continues to be extraordinarily high relative to its AA rated peers. BBB rated bonds currently trade at 3.34 per cent — 0.328 per cent lower than Bermuda. This means that Bermuda bonds trade at the level of BBB- bonds, which is one notch above junk-bond status. So the credit markets are not being fooled by Government spin. They know mismanagement when they see it.

Ladies and gentlemen, the Fitch report is telling us that this Government has walked Bermuda into a corner – a very tight corner — where our options are fewer and limited and our strength is depleted.

We cannot continue down this path. We need better leadership. We need honesty. We need realism.

The Government of Bermuda - your government - must be seen to be credible. Without that, there is no confidence and that, as I’ve said before, is the one essential we need to grow this economy once again.

The One Bermuda Alliance will provide that.