Worse-Than-Cyprus Debt Load Means Caribbean Defaults to Moody’s (May2013)


Source: Bloomberg – Worse-Than-Cyprus Debt Load Means Caribbean Defaults to Moody’s

Notable excerpts:

Three bond restructurings totaling about $9.7 billion in the Caribbean this year are failing to ignite economic growth and may not help the region avoid more defaults, according to Moody’s Investors Service.

The bond swaps this year didn’t go far enough to fixing the Caribbean’s “unsustainable” mix of debt and deficits, Warren Smith, the president of the Caribbean Development Bank, said May 22. Jamaica and Belize, which restructured about $9.5 billion in local and global bonds this year for the second time since 2006, face a “high probability” that they will default again, Moody’s said in a May 20 report.

Among Caribbean island economies, only the Bahamas is expected to grow more than 1.5 percent this year compared with 4 percent for Latin America, Moody’s said in an earlier report. Without faster growth, repeat defaults may become common as Caribbean governments find it easier to cut bond payments than spending, said Arturo Porzecanski, a professor of international finance at American University in Washington.

These countries are exhibiting an increased unwillingness to pay,” Porzecanski said. “We may be seeing the birth of a region of serial defaulters.

The average debt for a Caribbean nation compared with the size of its economy stands at 70 percent, with Jamaica, Antigua & Barbuda and Grenada above the 93 percent ratio that forced Cyprus to seek a European Union-brokered March bailout, according to the International Monetary Fund and Moody’s. Jamaica’s debt-to-GDP ratio reached 140 percent last year.

Investors are taking advantage of higher yields for Caribbean debt now and betting they can sell ahead of any payment problems, said Carl Ross, managing director at brokerage Oppenheimer & Co. in Atlanta. The results are also skewed, he said, by a 53 percent return on Belize’s debt this year, which covers a period in which the country emerged from default after skipping a $23 million coupon payment last year.

Even after its restructuring, Belize’s bonds yield 9.7 percent, the most among 58 emerging market economies tracked by JPMorgan’s EMBIG index after Argentina and Venezuela. Jamaica’s debt yields 8.3 percent. The yield on Cayman Islands bonds was 5.6 percent, compared with about 3.5 percent for similarly-rated China and Chile.

The bond rally in Caribbean debt is “more of a fluke,” Ross said. “It’s not reflected in the fundamentals by any stretch.

Jamaica’s GDP has contracted four quarters in a row, falling 0.9 percent in the final three months of 2012. International reserves tumbled to $866 million last month, prompting the central bank to say it would start selling a one-year, dollar-linked bond to shore up investor confidence and introduce two new certificates of deposit.

The Jamaican dollar has tumbled 6.2 percent this year through May 24, the most among Latin American and Caribbean currencies tracked by Bloomberg after the Argentine peso.

Jamaica’s local debt swap “buys a bit of breathing space, but I don’t think it addresses the fundamental issues in that Jamaica is verging on insolvency,” said Stuart Culverhouse, chief economist at Exotix Ltd. in London.

To prevent another restructuring, Jamaica’s government established an oversight committee and set up an office in the Ministry of Finance dedicated to implementing economic reforms, Finance Minister Peter Phillips said in a March 16 interview. The IMF said May 21 that the country is making progress in improving its economic prospects, aided by a $932 million loan from the Washington-based lender.

Following the restructurings by Belize and Jamaica, Grenada said on March 15 it would swap $193 million of global bonds as debt-to-GDP burden reached 105 percent. The island previously defaulted in 2004.

Holders of Grenada’s dollar bonds should expect a “significant” reduction in the value of their holdings as the island seeks its second restructuring since Hurricane Ivan in 2004, said Culverhouse. According to the terms of Grenada’s 2004 restructuring, the coupon on its dollar bonds was set to climb to 4.5 percent in September from 2.5 percent last year, eventually reaching 9 percent in 2018.

Grenada has simply run out of money,” Culverhouse said on a March 21 conference call.


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