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‘Market timing’ a red herring

Landmark transaction questioned: Curtis Dickinson, the Minister of Finance, says the average cost of government debt has been reduced to a little more than $1 million a year. Letter writer Robert Stewart disagrees (File photograph by Blaire Simmons)

Dear Sir,

Your two reports last week on debt refinancing regrettably ignored the real, and potentially disastrous, consequences of restructuring the horrendous levels of government debt.

For example, on November 24 your report was headed “Market timing assisted with debt refinancing”. It was not only debt refinancing, it was also about yet another increase in the amount of our borrowing and, consequently, our spiralling and unsustainable national debt.

It was stated that there was a repurchase of $424 million of debt, and simultaneously an issue of $650 million of new debt. Ignoring for the sake of simplicity the market prices of the respective debts, that looks awfully like an increase of government debt by about $226 million.

Martha Myron wrote on November 17 an excellent article in The Royal Gazette showing that, over the past 20 years or so, Bermuda has paid $872 million in interest on its borrowings. How on earth increasing our debt can be characterised as a meritorious achievement is a mystery. There is no wisdom in a policy that attempts to solve a debt crisis by creating even more debt.

The political action on resolving the long-term problems associated with government debt has been one of paralysis rather than action; to use a hackneyed cliché, the latest stunt is akin to rearranging the deckchairs on the Titanic. It is the fatal arithmetic of the financial decline of Bermuda.

In my business life, I have been associated with several large financing schemes and one of the valuable lessons I learnt is that such schemes are hugely expensive. Nowhere in your two articles is mentioned the significant costs of restructuring. I would guess — and I could be wrong — that in repurchasing $424 million and borrowing $650 million, totalling $1.074 billion, the fees for so doing would be in the order of $20 million to $25 million.

Those involved in loan restructuring love fees, which is why they love lending to Bermuda. Taxpayers should be aware that such costs are an additional deadweight to the disadvantages of borrowing — and that they are paying huge fees to Wall Street through taxation.

With regard to the self-congratulatory statements that the market timing was a stroke of financial genius, may I just mention the following three quotations:

“Market timing can only be accomplished by liars”— Bernard Baruch, a legendary investor of the early 20th century

“I do not know of anybody who has done it (market timing) successfully and consistently”— John Bogle, head of the Vanguard Investment Group, one of the largest and most successful investment firms in the world

“When there is a claim of unique opportunity based on special foresight [market timing], all sensible people should circle the wagons; it is the time for caution”— John Kenneth Galbraith from his book, A Short History of Financial Euphoria

Is it too harsh to say, about the latest government public statements on our borrowing, that they amount to deception regarding the benefits of increased indebtedness?