Greek lesson encourages can pay, won't pay states 1

By Martin Hutchinson

Aug 20 (Reuters Breakingviews) – Belize is trying to force a debt restructuring. The 330,000-strong Caribbean nation’s government has said it can’t make a $23 million debt payment due on Monday. The country is more or less solvent, but its cash is precious and its debt expensive. Foreign creditors have limited leverage, as the Greek and Argentine examples show. They can lose their shirts even if countries don’t go bust.

Tourism was picking up as a boost to Belize’s formerly mainly agricultural economy before the 2008 financial crisis, but has suffered since then. In recent years, government spending has increased, reaching some 30 percent of GDP, while external debt has ballooned, recently topping 90 percent of GDP before declining – but only slightly – in the most recent government figures. Part of the increase was caused by the cost of the controversial 2009 nationalization of telecom monopoly Belize Telemedia, previously controlled by British tycoon Michael Ashcroft.

One government objection to the bonds in question is that the coupon steps up over time, to 8.5 percent from 6 percent in the most recent period, reaching rates reminiscent of America’s pre-crisis subprime mortgages. Belize runs a primary budget surplus, before debt costs, of only about 2 percent of GDP. With debt not wildly different from output, anything much above a 2 percent interest rate requires additional financing. That may explain why, among the government’s published restructuring scenarios, the only one that doesn’t require creditors to take a 45 percent loss of principal offers interest at exactly that 2 percent rate.

Belize wouldn’t need to borrow so much if it hadn’t put political jollies like telecoms nationalization ahead of debt payments. A similar indiscipline afflicted Greece and Argentina. Meanwhile, the main countermeasure for investors – ostracizing defaulters in international capital markets – works only after the fact, and the threat is severely diluted by the readiness of multilateral sugar-daddies like the International Monetary Fund to lend, even to borrowers which have stiffed creditors.

Former Citicorp chairman Walter Wriston once suggested that countries don’t go bust. Even if they don’t, bondholders can still lose out badly. With examples like Greece encouraging governments to try take-it-or-leave-it tactics, investors should be on the lookout for states that can pay, but won’t.


– The government of Belize said on August 14 that it is “unable to meet” a $23 million coupon payment, due on August 20, on its $547 million U.S. dollar-denominated bonds due in 2029. The interest rate on the bond, initially 4.25 percent, steps up from 6 percent to 8.5 percent with this coupon.

– The government on August 8 released indicative restructuring options, including refinancing the so-called step up bonds into new ones yielding 2 percent and due in 2062 with no principal repaid for 15 years or into shorter-dated bonds with a 45 percent principal reduction.

– Belize is ranked 77th on the Heritage Foundation Index of Economic Freedom and 93rd on the World Bank’s Ease of Doing Business Index. It had GDP per capita, on a purchasing power parity basis, of $8,400 in 2011 according to the CIA World Factbook.

– Public spending was around 30 percent of GDP in the fiscal year to March 2012 and government debt was 81 percent of GDP at the end of April, according to the June 29 budget statement of Dean Barrow, Belize’s prime minister and minister of finance and economic development.

– Belize has as a fixed exchange rate system with its dollar set at a value of 50 U.S. cents.


Original Article

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