Standard and Poor’s said results for the first three quarters “underscore a rapid deterioration” in Barbados’ public finances and a “sharper economic contraction”. It revised its real GDP estimate to negative 4.8 per cent this year with a further decline of one per cent expected in 2010, before a return to growth in 2011. This underscores the IMF's earlier assessment and its focus on the unsustainability of Barbados' current debt profile.
This warning points to another worrying development looming on the horizon: Barbados' debt may be headed for the dread 'junk' status if it is downgraded another notch. Whether or not people like the term 'junk' is not material. What is means is that those people who look to lend will have to avoid Barbados as they face limits on how much debt they can carry that is not investment grade. To change things needs more than a shift in confidence. It needs policies that attack rapidly the size of the debt. The sands are drifting down the clock and I fear that Barbados may not have as much time to deal with this as it would like.
4 comments:
Dennis,
RE: Barbados' debt may be headed for the dread 'junk' status if it is downgraded another notch
I've been puzzled over the last few days regarding this and similar comments in the press and the blogs. Right now S&P rates us BBB (with a negative outlook), if they cut one notch then we will be BBB- (presumably with a stable outlook). That's still investment grade - junk starts at BB+?
I do not deny the importance of last Friday's move, nor the severe issues that face us if we continue to be downgraded. But the commentary has been a bit deceiving.
Kevin, you're right in terms of the intermediate ratings that S&P give. My use of 'notch' is with regard to the broad categories (see below, as I'm sure you know): BBB is the lowest investment grade; BB is the the next broad rank and that is non-investment grade.
Investment Grade
* AAA : the best quality borrowers, reliable and stable (many of them governments)
* AA : quality borrowers, a bit higher risk than AAA
* A : economic situation can affect finance
* BBB : medium class borrowers, which are satisfactory at the moment
Non-Investment Grade (also known as junk bonds)
* BB : more prone to changes in the economy
I think the writing is on the wall and must admit (because I know that it's easy to be complacent) that I would rather stress that the downward moves in the assessments have reached a critical point. I would not like to suggest that one should be comfortable that the next move may be to BBB-.
I completely agree with not being comfortable with BBB-. It's just that much of the commentary, including the bit of Avinash's Brass Tacks appearance that I heard, suggested that we are on the precipice of junk rather than one step back.
Perhaps the subtle difference in favor of urgency is a good thing in terms of pushing Barbadians to appreciate the severity of the direction in which we are heading.
Have a good one...
Major structural economic problems, and excessive debt is one of them, often take a catastrophe to see meaningful change. The ratings changes are good alarm bells to start acting soon. But, debt is like being on a ski slope: once you start down, it's hard to get back up. It's also a problem of perception: once seen as a bad debtor it's hard to get rid of the taint. Latin American lived with that for centuries (as did some US states) and many African and Asian countries have fallen into that bloc. Also, debt problems tend to recur, and that's been true for thousands of years.
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