Palm Trees, Beaches and Mountains of Debt
The level of debt in some Caribbean countries reaches the proportions of Cyprus. Experts speak of a “region of the serial defaulters.” For investors, the bond market is a gamble – with unbelievable returns. Germany’s Handelsblatt reports.
New York. So far this year, the Caribbean witnessed three rounds of bond restructuring, with total volume of around $ 9.7 billion. Yet even that did not suffice to get the economy moving again, according to the findings of a study by Moody’s. Additional defaults can probably not be avoided.
This year’s restructuring attempts have not gone far enough to address the unsustainable mix of deficits and debt in the Caribbean, judges Warren Smith, head of the Caribbean Development Bank.
Jamaica and Belize alone have taken restructuring measures amounting to over 9.5 billion dollars this year, for the second time since 2006. According to Moody’s, there is a “high probability” that these countries once again will not be able to meet their obligations.
Among the Caribbean islands, Moody’s expects growth exceeding 1.5% only in the case of Bahamas. But without more rapid growth rates, defaults could become the new normal, warns professor Arturo Porzecanski of the American University in Washington. “In these countries, an increasing reluctance is observed when it comes to payment,” says Porzecanski. “It could be that we are witnessing the birth of a region of serial defaulters.”
The average debt of a Caribbean country in relation to the size of its economy stands at 70 percent – with Jamaica, Antigua & Barbuda and Grenada above the 93 per cent mark, a level that forced Cyprus into having to accept an aid package. This is the harsh reality data from Moody’s and the International Monetary Fund (IMF) indicate. In the case of Jamaica, the ratio of debt to gross domestic product (GDP) soared to 140% above last year.
“In order to achieve a sustainable reduction of debt in the region over the next decade, we would need a combination of more aggressive fiscal consolidation along with a higher growth rate,” says Edward Al-Hussainy, Moody’s analyst for the Caribbean. “Both goals seem increasingly harder to reach.”
Bonds from the Caribbean and Central America have generated returns of 1.8% this year – compared with a decline of 1.3% in emerging markets as indicated by index data from JP Morgan Chase & Co. Investors take advantage of the higher current yields of Caribbean bonds and bet that they can sell the paper ahead of potential future payment problems, according to Carl Ross, managing director at brokerage Oppenheimer & Co. in Atlanta. Belize bonds have even managed to produce a yield of around 53% this year.
The bond rally in Caribbean bonds is “more of a fluke,” said Ross. “There are no fundamentals in this market.”