Debt assurance

ONE of the things favourable to Barbados as it contemplates debt reprofiling is that the foreign component of the country’s overall debt accounts for about 21 per cent of total indebtedness.

This point was highlighted recently during an interview with Ian De Souza, of the University of the West Indies, Cave Hill. He said that the majority of the debt outstanding is domestic debt.

De Souza who is also a former head of the Barbados operations of Republic Bank Limited, said that while a low foreign debt would have implications for Barbados’ foreign reserves position, it is true that the country’s position is a little favourable in that it does not have, relative to other countries, as much of a stock on foreign debt.

However, the official who is based at the Faculty of Social Sciences at the UWI, Cave Hill, said that once foreign debts fall due the country would need the reserves to service those payments. “That is a cash flow situation, and if it is a foreign debt the principal and interest rate payments, it could hit the reserves, depending on what your recurrent foreign revenue is,” he remarked.

De Souza noted too that if a foreign debt repayment had come up and it coincided with the sale of an asset then it won’t impact on the reserves.

The new Barbados government, led by Prime Minister, Mia Amor Mottley has revealed plans to reprofile Barbados’ debt which she puts at approaching 175 per cent of GDP. At March this year, the Central Bank of Barbados had put the figure at 151 per cent. De Souza believes that Barbados has no way out but to do some debt reprofiling.

He had said that unlike Grenada, one of the Caribbean islands which went through a debt reprofiling programme, Barbados has a lot of its domestic debt tied up in treasury bills which are short-term debt instruments.

The UWI official noted that if a country borrows by way of a bond the purchaser does not necessarily keep the bond. Rather, that since that bond is a tradeable instrument that has a coupon, the individual would trade it and people depending on their treasury management would take the bond, and sell it at a discount.

“A borrower issuing a bond, cannot come along and tell the lender, look sorry I cannot pay you eight per cent (interest) any more but instead I can only afford five per cent,” he explained.

“So when you cannot pay, you are defaulting on the original terms,” De Souza pointed out.

“Therefore, in any circumstances where you seek to ask for more time or you cannot meet the terms of the repayment, that would be treated as a default,” he added. (JB)