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Moody's warns of more Caribbean debt restructurings

Published:Tuesday | May 21, 2013 | 12:00 AM

A major international credit rating agency is warning of more Caribbean sovereign debt restructurings ahead of the Caribbean Development Bank (CDB) annual meetings in St Lucia this week.

The Wall Street-based Moody's Investor Service said on Monday that it expects sovereign credit quality to continue deteriorating in the region.

"We see the defaults of Belize (Caa2 stable), Jamaica (Caa3 stable), and Grenada (unrated) over the past year as being part of a broader debt crisis in the Caribbean," it said in a report.

"Moreover, we expect the risk of sovereign default in the region to persist as countries continue facing a combination of solvency and liquidity pressures and are increasingly unable and unwilling to service debt," the report said.

Moody's said the Caribbean's debt overhang is a "legacy of debt accumulation that started in the 1990s as governments accelerated borrowing, often from external commercial sources, to finance public-sector investment.

"At its core, the Caribbean's debt crisis is the result of a combination of poor fiscal discipline and unproductive investment that failed to significantly raise potential growth rates," it said, adding that it resulted in "low and declining long-term growth".

Moody's warned that an increasing number of Caribbean countries are likely to renege on their debts, stating that they are running out of options in addressing limp economic growth and dismal state finances.

"At the moment, we see a high probability that Belize and Jamaica will relapse into default," Moody's said, adding that some countries, such as Trinidad and Tobago and Suriname are more economically stable than others.

It said Jamaica has a debt-to-Gross Domestic Product (GDP) ratio of more than 100 per cent, while the Cayman Islands and Bermuda have ratios of 23 per cent and 28 per cent, respectively.

Referring to International Monetary Fund (IMF) data, Moody's said most small Caribbean states have debts-to-GDP ratios of more than 70 per cent and a current account deficit of 23 per cent.

The rating agency said the "policy toolkit for reducing debt in the Caribbean is limited", adding that many countries cannot devalue their currency because exchange rates are usually fixed or managed.

In light of big budget deficits, Moody's said many Caribbean countries are unable to stimulate growth through spending and investments.

"The lack of options has left debt restructuring as an attractive tool to reduce public sector debt," said Edward Al-Hussainy, the report's author and a Moody's senior analyst.

"As new restructurings unfold, we expect governments to be more aggressive in seeking principal haircuts to achieve lower debt loads," he added.

The report noted that the region has also been adversely affected by extreme weather that has often resulted in humanitarian and economic woes.

The Washington-based IMF said that since the early 1960s, the Caribbean has experienced losses equivalent to almost one per cent of GDP on average in weather damage annually.