Mon | Dec 5, 2022

Jamaican debt crisis a modern-day tragedy

Published:Friday | May 25, 2012 | 12:00 AM

Wilberne Persaud, Financial Gleaner Columnist

Apart from international interest centred on Bob Marley, reggae music and Usain Bolt, among Jamaica's top world-class sprinters, another feature of growing interest is the public debt burden and its similarity to modern-day Greek tragedy.

Mark Weisbrot in the May 18 edition of the UK Guardian compared the two economies in 'The Jamaicanisation of the Eurozone'.

There you go, thinking Jamaicanisation comes only through migrants with jerk pork, callaloo patties and reggae music at decibel levels of 'I want to disturb my neighbour'. Admit you're wrong.

Here's how Weisbrot sees our condition.

"Jamaica, an English-speaking Caribbean island nation of 2.9 million people, may seem worlds away from Europe. The country's income per person of $9,000 ranks it 88th in the world, as compared to the Eurozone countries, which are three or four times richer. But they face a common problem, and although none of the Eurozone countries is likely to become as poor as Jamaica is today, they could easily - going forward - mimic the dismal economic performance that Jamaica has seen over the past 20 years.

Jamaica has the world's highest public debt burden: interest payments on the government's debt account for 10% of the country's national income. For comparison, Greece - with the worst debt burden in Europe - is paying 6.8 per cent of GDP in interest.

This leaves little room for public investment in infrastructure, or improving education or health care. Partly as a result of this debt trap, Jamaica's income per person has grown by just 0.7 per cent annually over the past 20 years."

No dispute. More interesting is Weisbrot's comparison with the situation, policy efforts and prospects for Greece. The Golding administration, assisted and sanctioned by the IMF, organised Jamaica debt exchange, the JDX - a debt default not recognised as such - allowing lower interest rates and payments plus restructured principal payments.

Greece settled with the troika - European Central Bank, the European Commission, and the IMF - an agreement that reduced its debt. Private debt holders 'took a haircut' close to half their principal.

Jamaica was different. Foreign-currency denominated debt had no barber. The rationale, of course, must have been that confidence, once shaken in this aspect of government financing arrangements, would be hard, if at all possible to restore.

Apparently, one of the sticking points causing disagreement between former central bank Governor Latibeaudierre and Minister Shaw was this very point - confidence. It is not generally known that Jamaican entities hold a big part of Jamaica's foreign-currency denominated debt. The feeling is that no government would dare contemplate default on this. Such contemplation would be a game changer - a game loser.

Greece and the troika had no such fear, even anxiety. Private debt holders hugged their loss. The troika's expectation was that with its support, confidence would build; Greek borrowing capacity would improve.

If austerity measures were robustly implemented to cut the fiscal deficit, investors would become positively disposed to funding Greek debt by buying its bonds, requiring lower interest rates. So Greece cuts 8.6 per cent of GDP from its fiscal deficit over the last two years. Effectively, just as private demand falls away, government spending goes south. The economy responds with unemployment while confidence, said to require fiscal cuts, does not rebound. Austerity as a remedy seems to have failed.

Greeks took to the streets in demonstrations, the French spoke at the ballot box removing Angela Merkel's staunch ally in austerity. But the German Chancellor faces a different constituency, a different set of attitudes; and fears.

The ECB and Germans are terrified of inflation. Public sentiment goes against the idea of a Greek bailout. So while Germany can borrow internationally at rates close to two per cent, Greece must fork out in excess of six per cent.

Keynes' 1930s insights suggest the opposite of the policy Europe currently pursues.

Spain, Portugal and Ireland face similar, though not yet as severe economic problems as Greece. Use of the euro, their common currency, prohibits the magical one shot change in all relative prices - devaluation.

But there is insufficient 'unification' of sentiment. Europe is not yet 'one nation' in which the fight is 'one for all and all for one'. The euro is but one step in this direction aimed at accomplishing the objectives of the 'European Project' launched after devastation by two wars.

So what prompts Weisbrot's link between Europe's debt-ridden siblings in crisis and Jamaica? Here's how he speaks to the issue: "There are many important differences between the situation of the Eurozone countries and Jamaica - Jamaica needs debt cancellation; some of the Eurozone countries in trouble - would have a sustainable debt burden if the ECB would simply intervene in the sovereign bond markets and guarantee a low interest rate on their bonds. And the ECB, as the issuer of a hard currency in a monetary area with no serious inflationary threat, has a lot of room to do whatever is necessary to make sure that all of the Eurozone countries have low borrowing costs and therefore sustainable debt."

All of this is true, but here's the crux of the matter. Europe could, in the short term - there are other issues we cannot explore here - solve its problem quickly were its collective consciousness abiding with the view of 'One Europe'. This would mean shared, but agreed differential sacrifice among the peoples.

The problem, however, is that among nation states whose peoples display different attitudes to thrift, etc, hold divergent views on sometimes important social and political matters and often look with suspicion at each other, such an outcome seems on the distant horizon.

European sovereign debt is merely a concept, a concept which, as yet, has no counterpart in reality. There is Greek and Irish and Spanish and Italian debt, not Eurodebt.

This is the heart of the problem. Weisbrot's claim that 'Jamaica needs debt cancellation' is actually true. But how to justify it? And to whom?

What of precedent and Haiti, and might I dare mention Zimbabwe?

Like so many issues, the devil is in the detail. Thinking of them holistically does indeed offer meaningful highlights.

Wilberne Persaud is author of 'Jamaica Meltdown: Indigenous Financial Sector Crash 1996'.