What we ought to learn from our superbond

In last week’s Ripple Effect entitled “Where the real power lies”, I quoted United States President Obama saying to his electorate, “The lesson is that when enough people get involved, we have a pretty good track record of making Congress work.” Of course, that principle is applicable to our context as well.

This he said during his post-election campaign to voters to get them involved and rally their members of congress to make a deal that would supposedly solve their fast-approaching fiscal cliff, which is generally the simultaneous expiration of the Bush-era tax cuts that would see more than US$500 million taken out of the economy and sharp reductions in defense and non-defense spending.

The president wants the tax rates for families making less than $250,000 to remain the same, while those who make more than $250,000 to pay more in taxes.

However, his opponents, the Republican-controlled Congress—who, in principle, seem to agree with the “no tax increases on the middle class” position—also want to see the government cut more spending. In essence, they want to see more austerity measures. Thus, unable to agree, they’re stalemated, with only days to go before they reach the fiscal cliff, which experts say would be so abrupt and arbitrary it could throw “the United States back into a recession next.”

Because it affects every citizen, the US President has brought the issue to the people, informing them and urging them to help secure the bipartisan deal, before they start “cliffhanging” or worse.

      Parallels to our

Superbond dilemma 

There are indeed some strong parallels that could be drawn between the ongoing negotiations in the US over the fiscal cliff and renegotiations between the Government of Belize and the holders of Belize’s US Dollar Step-Up Bond due 2029 (Superbond), Belize’s Debt Review Team Leader Mark Espat told the Reporter Wednesday.

But there’s one conspicuous difference: the Belizean people aren’t so involved  in our negotiation process, as both GOB and the Belize Coordinating Committee that represents US$338 million of the outstanding US$544 million of bonds have agreed to do so behind closed doors.

We won’t complain about that, because it’s natural to think that private entities would prefer to  negotiate in private.

Notwithstanding  the confidential nature of the negotiations, this version of our “fiscal cliff” negotiations—which has its own version of proposed tax increases and spending cuts—is something that no Belizean should take lightly, and information is indeed very important as we move forward in this matter, because only an informed people can be adequately, and  objectively involved.     The Counter Proposal     

   from bondholders

The central figures in this current chapter are the confidential counterproposals that the bondholders issued on November 21, which GoB has clearly rejected, saying that the proposals were “wholly incompatible with  its [GoB’s] objective of placing the country’s debt burden on sustainable footing—a goal that the Committee itself has indicated it is committed to at various stages.”

As the term “confidential” implies, we don’t know exactly what the bondholders’ terms were; but we are able to piece together a few important facts.

Firstly , there were three proposals, which according to last week’s Ministry of Finance and Economic Development’s Memorandum, are all “based on par structures,” implying that the bondholders offered no reduction in the bond’s principal amount of US$544 million.

We also know that they offered temporary reductions to the current 8.5 percent coupon [interest] rate “with modest extensions in average life.”

However, according to the ministry’s memo, all three of the bondholders’ scenarios eventually returned to that same 8.5 percent “upon the expiry of the reduced coupon period.” This is the same coupon interest rate that prompted this administration to try and restructure the bond in the first place, because it created an unsustainable fiscal situation.

How long before the reduced rates expire? We cannot say for sure, but whatever coupon rates were proposed, according to A.J. Mediratta, of Greylock Capital Management, LLC, co-chair of the Committee, at least one of the bondholders’ proposals offered “debt service relief of more than [US] $150 million over the next 10 years.”

Unlike GoB’s terms, the bondholders also added  peripheral conditions dubbed as “Required Terms”.

These accompaniments to the three scenarios included the “issuance of GDP warrants/oil recovery certificates, the inclusion of net present value ‘reinstatement clauses, and the payment of consent fees to participating creditors, among others.”

According to Espat, the GDP warrants were guarantees that would grant an increase to how much the bondholders can get once the GDP increases. So, if our GDP goes up, their compensation goes up. The same principle holds true if the country finds more oil: they expect to get more.

Regarding the “consent fees”, the bondholders’ options were also expecting GoB to compensate or pay creditors for participating in the process.

The Ministry’s memo also stated that although “the details of the Required Terms are insufficient to carry out a full valuation, the GoB estimates that the Committee’s counter-proposal is designed to be no worse than NPV [Net Present Value] neutral once the combined effect of the Required Terms is factored in.”

Essentially, the bondholders are trying to stick as close to the original amount as possible. Espat said that GoB has rejected the counter-proposals and  is categorically opposed to all the ‘Required Terms’.

Creditors’ ultimatum

But the fray doesn’t end there, as the bondholders rejected government’s two revised payment schedules (the Revised Indicative Scenarios) that were publicized last Thursday, on the premise that we don’t look desperate enough.

A.J Mediratta, of Greylock Capital Management, LLC, and Co-chair of the Committee said: “We want to urge the GOB to reconsider the proposals from the Committee, and also want to be clear that debt relief at the levels sought by the GOB could only be justified with more tangible and objective signs of the country’s stated distress, such as the acceptance of an IMF [International Monetary Fund] program.”

According to Espat, the bondholders believe that with further belt-tightening on Belize’s part, we could achieve more than the estimated 2 percent primary surplus budget by adhering to their idea of fiscal consolidation or accepting IMF’s intervention.

Both suggestions may lead to a 4 percent primary surplus but would “entail retrenchment and tax hikes. …then debt relief would not be required. In any case, these are paths that are viable or achievable, ” Espat said.

Completing the full circle back to a stalemate position, Espat added, “GoB will not reconsider its rejection of the [Committee]’s proposal. The government remains committed to a negotiated solution to Belize’s debt plight but this must be based on sustainable assumptions.”

      Looking out 

      for ourselves

“This much is clear: if it comes down to Belizeans losing their jobs (the retrenchment approach) or paying more by way of taxes, that would be fine to them as long as they get their money; and honestly speaking, I can’t really blame them for wanting their money.

“The current government has gone on record to say that there cannot be a bad borrower without a bad lender, and that’s a fairly reasonable principle to employ as well.

“However, that principle is a double-edged sword, because it implies that there was a bad borrower: the Belizean people.

“As I said last week, decisions made by a government are made on behalf of the people who elected them; therefore, their decisions are a reflection of the electorate’s interest.

“We all know that it was largely during the ten-year reign of the previous PUP administration that Belize’s commercial debt sky rocketed and multiple loans were eventually combined to form the current superbond. And we have all heard by now the tales of how we got nothing for it all.

“We can go around in circles and blame government all we want, but seriously, at the end of the day, it’s our economy, and everything this superbond has taken and threatens to take is a fruit of what we allowed as a people. Whose job is it but the electorate’s, to look after ourselves?

“The superbond is a symptom of the limited transparency and accountability structures that have been allowed to fester.

“While the U.S. big boys battle over the fiscal cliff, one fact remains true: the average US middle-class family would see its taxes rise by 2200 if Congress doesn’t extend the current tax rates for those earning less than $250,000, before the year ends. It all comes back to the people”.

In the same way, the fruits of the superbond  and every other debt comes back to us.

When will we, at the very least, see the electorate as a whole demand the adequate functioning of  entities such as the Integrity Commission, the Public Accounts Committee, and whatever structure that exists to ensure transparency & accountability and effectively guard against repeats of the type of blatant nonsense that got us to this “super bondage” in the first place.

The script of every political campaign must be upgraded These are things that should be the crowning demands on the policy agenda to help us, the people, look out for our own national interest, and rely less on government. That’s the lesson that this superbond should teach us all.

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