Concern over Island’s debt burden
It’s no secret Bermuda’s national debt has soared. But exactly how much is owed, and how concerned should we be in light of Standard and Poor’s (S&P) downgrade of America’s debt from AAA to AA+?“GDP doesn’t pay back debt, we the tax payers have to pay back this debt, plus the interest which is budgeted to be $70 million this year. Combine that with mandatory contributions to the sinking fund, the Bermuda government debt service is about $95 million per year.
Economic experts say there is no imminent risk of default by Bermuda, however, the island is in a vulnerable position, having now to fork out nearly $100 million a year just to service the debt it has taken on.
“Bermudians should rightly be concerned about the national debt because it is a serious issue,” said shadow finance minister Bob Richards.
Mr Richards said Bermuda’s debt has soared from $176 million in 1998 to almost $1.2 billion today - about a 610 percent rise.
He added: “We don’t know the exact figure, but we do know that the legal debt ceiling is $1.25 billion.
“The Ministry of Finance claims this is OK because our debt-to-GDP ratio is lower than other countries. But the smallness, openness and fragility of our economy makes this a nonsense argument.
“This is money that has to be set aside before civil servants’ salaries, financial assistance or any other contractual obligation is paid by Government. This burden of debt severely limits the amount of assistance the Government can provide Bermudians during these difficult times.”
He added: “Growth in government debt has been accumulated as a result of spending more than it took in, for the last eight consecutive years of its twelve year tenure. This excess spending was based on the naive and irresponsible assumption that government revenues would continue to grow indefinitely. Well they haven’t and we’re stuck with this mountain of debt in a no-growth economy.”
However, Premier Paula Cox disagreed, saying: “While we needed additional revenues in 2010/11 because of the extensive social agenda programmes such as the child day care credit and Future Care, I was comfortable with the roll back given the commitment to reduce Government expenditure by $150 million.
“The ratings downgrade of the US, based on the S&P assessment that their debt reduction plans were not feasible supports the Bermuda Government’s strategic decision to reduce debt in order that we remain in good standing with the rating agencies.”
She added: “I note the passage of the Good Governance legislation, the creation of the Procurement Office and the refinements proposed to Financial Instructions to ensure there are more enhanced internal controls and the plans to establish a Procurement Code of Practice. I can also note that we are currently engaged in addressing the plans as stated in the 2011-2012 Budget for rolling out the Open Budgeting framework. Further there has been a commitment to enhanced monthly budget monitoring and control exercises which compares actual spend against budget allocations. This is to allow for earlier intervention and corrective action to revise planned expenditure.”
On the S&P’s US downgrade, Mr Richards added: “S&P ratings today defy logic. Since the US downgrade last Friday we have the nonsensical situation of the Isle of Man, an island with a similar population and economy to Bermuda having a credit rating higher than the US.
“I suspect financial markets will be paying less and less attention to sovereign credit ratings going forward. Having said that, the last comments that S&P made about Bermuda cautioned about government deficits and that their continuance could result in a downgrade. While the latest government budget forecasts a small surplus, we think that was wishful thinking, and we anticipate yet another deficit fiscal year.”
Standard & Poor’s last September raised its outlook on Bermuda’s creditworthiness to stable from negative.
In its statement, S&P said its decision to affirm the Island’s AA long-term credit reflected “receding economic, fiscal, and banking-sector risks compared with our expectations in mid-2009”.
However S&P warned that “the ratings could come under downward pressure if the general Government deficit was to continue at current levels due to weaker-than-expected economic growth or flagging political will to consolidate fiscally”.