Stormy Weather

I am going to tread lightly around the subject of financial calamity--though I guess that my choice of words already suggests that I have more concerns than feelings of comfort. Sunday's 'Brass Tacks' on VOB radio had a discussion about the regional and national impact of recent financial difficulties faced by financial enterprises in the region, particularly, CL Financial and Stanford International Bank. As I said on the radio, there are many things to discuss, and I kept my intervention to aspects of economic consequences that come from the importance as employers of the two financial groups and their significance also as lenders and takers of deposits to/from within the Caribbean and further afield. My good friend, Avi, had offered me some thoughts about the need for regional coordination and I left him to throw those out rather than steal his thunder. Some friends here, who are entrepreneurs, asked me some questions during the day about the level of understanding I believe politicians have about some of what is going on. I had to say that I thought that many did not have much of an idea, and that was not meant to be belittling; the area is fraught with aspects that even so-called experts find baffling. I have had a long career in international finance and I am discovering things everyday, and old understandings are constantly being challenged.

The early indications are that CL Financial's problems in Trinidad are local in origin to the extent that they are not a direct result of association with the problems with sub-prime mortgages or residential lending in the US or Europe but come from the impact of lower international energy prices on local projects financed by the group (especially in ethanol production). On the face of it, the CL Financial's balance sheet does not suggest that the financial problems swirling around the world's biggest banks are not the same as those rearing their heads in for that institution. Nonetheless, the implications for the local and regional financial scene are immense because the group has its hands and feet in many aspects of financial and industrial life and is intertwined in various forms throughout the region. It would be naive to ignore the importance of the group in financing government, not least through tax payments. What happens to it must be important and avoid its failure is understandable. If there is wider fallout than in Trinidad the situation could get very messy. The actions taken to date are meant to stave off the most obvious problems, but because of gaps in supervision and lack of certain timely data the real impacts may not become apparent for a while. It's with that optic that one should recall the recent indication from Trinidad's central bank governor that things are worse than initially suggested.

Stanford International Bank's problems appear to be the result of a man doing some dishonest things and pretending to be investing but doing nothing much else than fleecing people locally and internationally and putting up a great front as a financial hotshot who was doing safe things with people's money. But a scam of sorts was being played and many were suckered in by those good old con tricks: the good looks, the smart dress, the apparent fancy life style, etc. For Antigua, the immediate impacts run the risk of being as devastating as a major natural disaster. The Stanford group, both as a local banking presence and as an international banking operation was the main private sector employer. Stanford came to personify Antigua, not least because all of his 'belly' was out on show as you arrived at the airport. The known links with the government were very close and personal. What the freezing of Stanford assets may mean for government finances will soon become apparent; the taking over by the East Caribbean Central Bank of the local bank, Bank of Antigua, and reportedly consolidating the operations of other Stanford banks in its jurisdiction may be a shoring up operation but I wont guess where that may end. Already, those local or regional activities financed by Stanford are feeling the cold wind of clothes being blown to shreds: cricket (and whoever heard of a Texan who was crazy over cricket?) will be the immediate casualty and those who were responsible for getting into bed with Sir Allen may have many awkward questions to answer. Others who got political contributions, such as US politicians, are running fast to shed any sign of that money, and charities will be the immediate beneficiaries, though one has to wonder if they will have to repay the money after the SEC's fraud investigations are over.

I mentioned yesterday that some fall out from the wider international financial crisis is only now beginning to have its impact on Barbados and perhaps more of these effects are going to filter through in coming months. A Bajan tourism project has reportedly run into financing problems that may curtail or halt permanently its progress and reports indicate that two major banks that are in real trouble, Britain's Royal Bank of Scotland and Iceland-owned Kaupthing Singer and Friedlander, are behind the financing (see Caribbean NetNews report of February 21). The implications are not rocket science and should be no surprise. Once it has become clear that there is problem with a financier, for example, alternative sources are going to be approached and may come forward, but if they do not, then the reality has to be accepted. Governments have a tendency to feel that they have to fix everything, so in no time, they are stepping into business when they have no business in business. Politicians love taking credit but they also hate being pointed to as 'the problem', so intervention often happens too often as a form of butt protection, and few people like being the butt of criticism or the person to whom people point and say "But he/she could have done something."

The scurrying to shore up local and regional financial institutions shows that things can change fast. Barbados' central bank governor said a few weeks ago that problems would surface later rather than sooner; but later can arrive quickly (see Caribbean 360 report from September 2008). Winds can change rapidly, as we know this past weekend when they ripped the island.

Local financial officials face a huge challenge in the next few weeks to shore up financial institutions, retain public confidence, not wastefully engage public funds, let businesses work out their problems, and keep their political shirts on. We live in very interesting times.