Economic analysts are sounding alarm bells about the Bermuda economy, saying Government may need to consider bold steps to avoid the potential of the Island sinking further into recession in the coming months.A board member of the Chamber of Commerce warned as many as “one third of restaurants in Bermuda and a lot of retailers” were in financial trouble, given the Island’s now three-year decline in retail sales.Financial analyst Nathan Kowalski said real income growth in Bermuda appears to have stalled, while the Island seems “stuck at a constantly high price level with only a very modest improvement in productivity”.And the writer of a letter to this newspaper predicted “more companies will go belly up and the banks’ problem loans will again swell” if nothing is done to help Bermudians work off their “over-indebtedness”.HSBC Bermuda confirmed it had seen further “increased incidence” in non-performing loans this year but said due to customer confidentiality it could not give a figure of how many had ended up in foreclosure.So what can be done to boost the economy?Premier and Finance Minister Paula Cox assured yesterday that a raft of measures are being worked on to aid recovery (see separate story), including:l Protect our reputation and continue to promote Bermuda.l Sound public finances and good governance.l Speed up structural reforms (Civil Service, policy and legislative reforms).l Keep the doors open for business and develop workforce (efforts to introduce a 10-year work permit and job creator incentive programme, and a payroll tax reduction this year that injected $50 million into the economy).Additional measures being urged by experts we spoke to include: lowering interest rates by banks, the private sector dropping the price of goods and services as part of a “shared sacrifice”, and trading more with foreigners.The writer of a Letter to the Editor raised eyebrows this week with comments about the banks and local interest rates.“In Bermuda,” the writer said, “there have been 38 consecutive months of falling retail sales and on an inflation adjusted basis these annual declines are averaging somewhere in the six to ten percent region.“In order to maintain margins, companies look for higher unit productivity levels through lay-offs. These lay-offs lead to lower aggregate income levels which feed back into less consumption which leads to lower top line revenues and more lay-offs ensue.“The West has been desperately lowering interest rates to try to offset the pressure on margins. Japan, America and Switzerland have their rates virtually at zero while Europe seems very likely to back off from their ill timed move to 1.5 percent. Bermuda still has base rates at 3.75 percent with the average Joe paying a seven percent variable. Thirty-year fixed rates in the US are flirting with the four percent level. “The letter writer went on to say: “Too much money is flowing to the banks at the expense of the main street economy. People pay their mortgage at the expense of discretionary spending in the broader economy. My belief is that there will be a break soon and more companies will go belly up and the banks’ problem loans will again swell ...“If the banks don’t take a smaller share of total income, the problem could move from a liquidity issue to a solvency issue. With around $8 billion in loans, a 25 percent drop in the price of real estate could lead to a solvency issue with the banks. I keep hearing that the banks are willing to work with individuals on a case-by-case basis, which is good, but I feel that not looking at the big picture is convenient to their quarterly earnings but potentially catastrophic to their longer term situation.”In response: an HSBC Bermuda spokeswoman said, “We continually review tariffs and rates to ensure our pricing remains competitive in the local market.”And Premier Paula Cox told The Royal Gazette: “Government does not dictate commercial lending rates, and imprudent forced downward pressure on interest rates in this current climate may be counter-productive as the banking sector works to adjust to the new realities including tighter regulations.”She added: “The current economic climate clearly has affected the banks’ appetite for risk, and commercial institutions do not wish significant impairment to their bottom lines, but we would also expect them to recognise that there is a responsibility in these difficult times to adopt and craft policies that are both sensible and sensitive to the changing economic circumstances.”The Premier pointed out Bermuda’s banks had “taken early precautions”, having already strengthened their loan and investment portfolios during the opening phase of the recession.“These steps,” Premier Cox said, “have led to the aggregate risk asset ratio of Bermuda’s banks as of March 31, 2011 being at 21.3 percent, significantly above the internationally recommended standard of eight percent.Nathan Kowalski, chief financial officer of Anchor Investment Management, said the problem in Bermuda’s economy is not high mortgage rates, but the high cost of goods and services that is “crimping consumption and growth”.Mr Kowalski said: “In most developed economies productivity has soared. Sadly Bermuda seems stuck at a constantly high price level with only a very modest improvement in productivity. This in fact is very uncompetitive. The problem is also worse when one considers that real income growth also appears to have stalled.“Most companies are trying desperately to defend their margins and are trying to make up for lost volumes with higher prices or at the very least maintaining prices that are globally uncompetitive.“Due to the size of this economy and the small population, a number of industry groups operate in quasi monopolies. I hate to use this word but some industries are on the borderline of colluding to defend their business models and structure.“The obvious downside to becoming a leaner and more productive company in Bermuda is the assured higher level of job losses. This of course would exasperate the lack of discretionary spending and consumption. In a typical capitalistic system a drop in prices leads to an increase in volume. Sadly this is very unlikely to be a compensating volume increase on the island. Thus it really comes down to whether corporations are willing to offer a ‘shared sacrifice’ to help struggling consumers at the expense of corporate profitability. This, in my opinion, is very unlikely.”Comparing Bermuda interest rates to those overseas, Mr Kowalski added: “According to rates posted by the Mortgage Bankers Association of America, the average 15-year fixed rate mortgage is now only 3.47 percent. The 10-year fixed-rate mortgage in Canada, however, is about five percent and the rate in the UK is about 5.5 percent.“It is also unfair to compare bank rates in the US to those in Bermuda to some degree because the risks are different in these two countries. It could be argued that the risks to lend in a small undiversified economy such as Bermuda are higher and therefore the banks are justified in charging a higher rate to compensate them for this risk. If one looks at other less developed countries rates are even higher: roughly seven percent for a five-year fixed mortgage in Mexico, for example.“I also would suggest that it is highly unlikely that banks which are struggling immensely at these levels to generate acceptable levels of profitability will do anything to lower rates as this would ultimately cut into their net interest margins and further pressure profits. If they were to cut rates it may lead to more jobs cuts to maintain their profitability. The negative feedback loop would just continue as the previous author alluded to.”Peter Everson, who is on the Chamber of Commerce board of directors, and president of PEConsultants, said he also did not agree that lowering interest rates could help the economy.“Cheaper credit isn’t the answer,” Mr. Everson said. “The argument doesn’t take into account the other side of the coin, the people who lose out by lowering interest rates are the savers. And that ends up taking money out of the economy.”Mr Everson said the Island was suffering the effects of what he termed “poor economic policy” that resulted in a large-scale work permit reductions.He said the global economy can be only about half blamed for the loss of work permit holders in Bermuda, which he said has had a filter-down effect on everything from dining out to real estate prices.“The bottom line is in this economy, we have to trade more with foreigners,” he said.In a recent Chamber report, Mr Everson noted the total Government deficit in 2009 was $366 million; $354 million in 2010; $369 million in 2011 (latest estimate); and $286 million in 2012 (budgeted).He said in 2012 Government is expecting to spend $473 million on direct employment costs which is 52 percent of all expenditures.In addition to this, he said, is the funding of the approximately 1,400 people employed by the quangos who receive total grants of $227 million, the majority of which goes on employee costs.