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Default and devaluation dangerously close

By Benjamin Flowers
Staff Reporter

Prime Minister Dean Barrow is in New York meeting with GOB’s financial advisors, currently in restructuring discussions with holders of the 2038 Bond, trying to finalize an agreement to avoid a default on the US $26.6 million Superbond payment due on Monday.
Barrow’s departure underscores the severity of the situation in view of the penalty if Belize should default on the upcoming payment. As a part of the legal provisions of the bond, if GOB defaults on either principal or interest payments before the bond’s 10th anniversary, it must pay an additional 11.11 percent of the principal amount (US $59 million) within five days of the default.

The Reporter understands, however, that if GOB were to miss the upcoming coupon payment on Monday, creditors would still need to wait a period of 90 days, according to New York law, before approaching the Trustee, New York’s Mellon Bank, to declare a default.
Sources also say GOB could attempt to make a partial payment in the interim, but bondholders could choose to decline the partial payment.

The Reporter also reached out to Special Advisor for the bondholders, Charles Blitzer, late on Thursday but he had no comment on the status of the discussions. Government’s press office didn’t offer much detail on the status of negotiations either.
Credible sources, however, have indicated to the Reporter that GOB may consider asking bondholders for a reduction on the principal with a proposal to increase the interest, currently at 5 percent , to 6 percent.

In GOB’s consent solicitation to bondholders on January 12, GOB had proposed that the interest rate be lowered to 4 percent and that amortization payments be rescheduled into three equal payments beginning in 2036.

Bondholders had rejected the proposal, saying that GOB did not provide enough information on how it intended to sustainably grow the economy, and avoid future restructuring.
GOB responded to their rejection by extending the consent solicitation, but keeping the exact same proposals. GOB’s attempt to restructure the bonds, stems from the country’s foreign reserves being critically low.

Addressing a US $50 million arbitration award claimed by Michael Ashcroft, former Central Bank Governor Glen Ysaguirre, wrote to Financial Secretary Joseph Waight in July 2016, explaining that the reserves were so low, paying such an award could lead to the devaluation of the Belize dollar.

“Without domestic adjustments and increased inflows, it is going to be very difficult, if not impossible, for the Bank to protect the exchange rate peg of BZ$2 to US$1,” Ysaguirre wrote.

In late 2016, new Central Bank Governor, Joy Grant, revealed that the Central Bank’s foreign reserves were around US $315 million. In accordance with the international benchmark for exchange rate sustainability, Belize must have at least three months worth of merchandise imports (US $300 million) in reserves at all times.
Falling below this threshold would make the country’s 2:1 exchange rate peg unsustainable and result in a devaluation of the country’s dollar.

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