Wed | Sep 28, 2016

EDITORIAL: Big move by financial sector

Published:Sunday | January 31, 2010 | 12:00 AM

In his triumphant declarations of the success of the Government's rescheduling of over $700 billion of domestic debt, the finance minister, Audley Shaw, has been highlighting, correctly, the potentially "game-changing" impact of the development.

What Mr Shaw has not done sufficiently enough, we feel, is to recognise the magnitude of the sacrifice, and the depth of the commitment to the national interest, displayed by financial institutions in going along with this deal.

At the original January 26 close date of the debt exchange, which slashes and extends their maturities on the Government's bonds, there was already a commitment to surrender 91 per cent of the instruments. That was just beyond the threshold for formalising the arrangement and to meet a critical precondition for the International Monetary Fund (IMF) to lend Jamaica US$1.25 billion under a 27-month extended fund facility.

Analysis of the swap has centred mostly on the unsustainability of Jamaica's debt, currently at more than J$1.3 trillion, or nearly 140 per cent of GDP - requiring 60 per cent of the tax revenues and a similar proportion of the annual Budget to service. Indeed, last week's rescheduling, the Government reckons, will "save" an estimated J$42 billion in interest payments, which is a substantial contribution to the reduction of the fiscal deficit, now running at nearly 13 per cent of GDP.

But this debt deal, at least in the short term, will be at a substantial cost to financial institutions, particularly those security dealers who depend heavily on trading in government instruments for income - in some cases as high as 70 per cent. With gross interest returns on domestic bonds slashed by as much as half, the margins of financial institutions will be trimmed, impacting their bottom lines and, more important, their balance sheets. Understandably, the Government's agreement with the IMF proposes a US$1-billion support fund for those institutions that may fall under stress.

fiscal crisis

Clearly, the fiscal crisis faced by the Government, exacerbated by global recession, prodded the administration into the debt-exchange programme. Financial institutions signed on, in part, out of enlightened self-interest, understanding that an underperforming or collapsed economy is not, in the long run, to their advantage.

But before people act in enlightened self-interest, there is first the enlightenment.

Indeed, while the Government's eventual scheme was much broader, it is to be recalled that it was domestic financial institutions that first offered a "liquidity management" programme to help cushion the administration's fiscal burden.

most significant act

The debt exchange, perhaps the most significant act by the private sector in Jamaica's history, obligates the Government to behave responsibly. It must understand that the $42 billion 'freed' by the programme is not a windfall to be used to shore up its electoral chances.

It is urgent that the administration show, in a pre-Budget articulation, where and how it intends to reduce spending in the coming fiscal year.

The Government must also provide the specific outlines, including the targets and policing mechanisms, of its much-talked about fiscal responsibility legislation. Nicodemus-like implementation will not be tolerated.

Prime Minister Golding must honour his declared "compact" with savers including by strengthening the country's financial management which, though improved with some appointments at the technocratic levels, remains largely shambolic.

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