Debt Before Dishonour – St Kitts Defaults as it Restructures

The credit rating of St Kitts and Nevis, the smallest independent state in the hemisphere, took a hit when it defaulted on a bond payment the end of November.

The administration of Prime Minister Denzil Douglas, in the midst of developing a debt rescheduling package with the help of London-based consultants, White Oak Advisory, to meet IMF stringencies, announced Wednesday its “inability to make payments for a bond which became due on November 25”.

With the current global focus on the possible collapse of the Euro because of the precariousness of the Greek economy within the European Union, watchers of Caribbean regional integration will be concerned about the evolution of the Organisation of Eastern Caribbean States (OECS) – pop 550,000, which shares a common currency and is deepening economic and financial ties among its eight members that include the federated islands of St Kitts and Nevis (pop 51,300).

“As one of the most heavily indebted countries in the world (public debt around 200 per cent of GDP), the credit rating for SKN was pretty low before this credit event took place,” said Arjoon Harripaul, head of ratings and research at Caribbean Information and Credit Rating Services Ltd (CariCRIS), the region’s credit ratings agency based in Port of Spain, Trinidad, in response to an Abeng News query.

“Wednesday’s development means that the rating for (the) Government of SKN would now be D – Default,” he said, explaining that CariCRIS does not have a public rating on the Government of St Kitts and Nevis. “However, as part of our benchmarking and monitoring of developments in the Caribbean, we do maintain a private rating on each Government in the Region,” Harripaul added.

The government’s Financial Update issued in June acknowledged, “St Kitts and Nevis’s public debt burden as measured by debt/GDP and interest/revenues is now a multiple of the average for the other countries in the ECCU and for emerging market countries rated single ‘B’ (see Table).”

Maybe because there isn’t an Occupy movement in Basseterre, or because the people of one of the most indebted nations in the world aren’t like Greeks ‘behaving badly’, the news didn’t cause a stir in the region.

The Federation’s ministry of finance, in a “Creditor Update” on its Web site, said the government was in “advanced discussions” with the Barbados-based Caribbean Development Bank (CDB), which it owes about $380-million of its nearly EC$2-billion debt, to provide “a possible partial guarantee from the CDB to be attached to the new instruments that will be issued by the Government to participating creditors as part of the comprehensive debt restructuring exercise that is currently underway”.

Just what this default means for the local and or OECS economy is not clear. White Oak’s director David Nagoski, in response to questions about the possible impacts would only say, “at this point in the restructuring, we are only discussing issues with actual holders of the bonds.”

In July, the IMF Executive Board approved a three-year US$84.5 million stand-by arrangement with St. Kitts and Nevis, bringing to six the number OECS countries in agreements with the Fund. (The others are Antigua and Barbuda, Dominica, Grenada, St Lucia and St Vincnent and the Grenadines. Anguilla and Montserrat are British dependencies)

Accompanying the loss of preferential sugar and banana markets in the EU, their tourism mono-industry economies have taken a battering from the crisis facing Western economies.

The Eastern Caribbean Central Bank (ECCB), headquartered in Basseterre, which manages the activities of the East Caribbean Currency Union (ECCU), had already set up a Debt, Growth and Development Task Force. The bank’s 71st meeting of its Monetary Council, October 21, received the task force’s “preliminary findings and views” on: the evolution of debt in the ECCU; the growth/debt nexus; a strategy for achieving debt sustainability; and strategies for attaining sustainable growth.

The Council approved a vision for the financial sector through “the urgent establishment of the single financial space as set out in the new Treaty of Basseterre creating the OECS Economic Union under Article 4.1 (e) which states – ‘to establish the Economic Union as a single economic and financial space’.”

According to the ECCB’s Web site, the monetary arrangements are characterised by: the issuance of a single common currency, the flow of which is unrestricted among its members; a common pool of foreign exchange reserves; and the existence of a Central Monetary Authority which decides on the Union’s monetary policy. It has maintained an exchange rate of about 37 US cents to the EC dollar for more than 30 years.

In February 2010, the IMF approved a billion dollar agreement with Jamaica (pop 2.6 M), the most populous of the 15 Caribbean Community (CARICOM) countries, of which the OECS is a subset, after the then prime minister, Bruce Golding, successfully negotiated a restructuring of domestic debt.

That restructuring, incorporating lowering interest rates on the principals as the centrepiece, has had limited success overall. Institutional investors who hold government bonds now have a smaller spread to take profits in their on-lending activities but still maintain healthy bottom lines. But the government in Kingston has found it difficult to make the harsh job cutting and service slashes to suit international funders – a likely reason Golding recently stepped aside for others to make the politically tough decisions.

Basseterre proposes cuts to principal and interest in addition to swapping off Crown lands to reduce its debt. Like Jamaica, the government is the largest employer. But unlike the larger neighbour job cuts are not openly spoken of.

But in a world in which high tech communication, information processing and logistics are kings, and in which countries like St Kitts and Nevis and its OECS and CARICOM partners retain their status as clients delivering primary products, whether to OECD or BRIC states, the immediate future is debt, default and economic death before any glorious resurrection.

About Mark Lee

Mark Lee has been a long-time journalist writing, editing and producing in print, radio television and new media.

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