Mar 2012 Financial News

Jamaica not seeking a Greek style bailout

Mar 04, 2012

Following her keynote presentation for the Jamaica Investment Forum on Thursday, in an unscripted interview with major international news provider Bloomberg, Jamaica's Prime Minister Portia Simpson Miller is reported to have stated that "if we could get a bailout like Greece, lord have mercy, you would see Jamaica grow and flourish. We know we would never be able to get the same level as Greece, but if we could get some consideration from countries or the International Monetary Fund (IMF), we would be on our way."

The first point to note is that rather than what was implied in the title of the Bloomberg article "Jamaica PM Seeks Greek - Style Bailout", namely that she was "seeking" a bailout, the Prime Minister was merely suggesting that we might benefit from one.

This is important for two reasons. The current policy of the government of Jamaica is not to "seek" a bailout, but merely to negotiate a new IMF agreement when the current one expires in May. At the beginning of the year, new Finance Minister Peter Phillips noted that we did not have a balance of payments problem at the time (normally a prerequisite for large scale new IMF financing), but that we were seeking an IMF agreement to unlock the other multilateral loan and grant financing, as well as the unreleased IMF funds already overdue. An IMF agreement was also regarded as important for international and local market confidence.

The Prime Minister would have noted the huge headline number for the bailout that Eurozone finance ministers had agreed for Greece, namely 130 billion Euro's in new loans (one Euro is worth just under $1.32 US), and observed that if we could get even a much smaller level of financing, then, as she put it "we would be on our way".

However, as stated in a recent Union Bank of Switzerland report, the money is not really for Greece, but primarily for its creditors.

The difficulty with the Prime Minister's statement is that despite Greece getting a huge bailout of 130 billion Euro's, its bond investors are also being asked to "voluntarily" take a 53.5 per cent cut in the nominal value of the bonds, for a total reduction of over 70 per cent in net present value terms including the impact of lower coupons.

The danger is that less informed international media and investors (those not so familiar with Jamaica for example) might assume that in addition to a "bail out", the current Greek approach of simultaneously "bailing in" the private sector is being advocated for Jamaica by our Prime Minister. This is not the case, and was certainly not stated by the Prime Minister in the piece. Indeed, ironically it has been the other way round, with both Dr Carl Ross, and Jamaica's former finance Minister Audley Shaw suggesting that Greece should have looked at what Jamaica did much earlier, namely the Jamaica Debt Exchange (JDX). See for example Dr. Carl Ross's comments in my Observer article last week entitled "What's the difference between Jamaica and Greece" on his recent research piece.

Responding to the Bloomberg article, Ross observes

"I think the PM's comments were taken out of context. She knows that debt doesn't just magically disappear. The cost to Greek people and Greek banks has been enormous. My sense is that the PM was indicating that Jamaica will be re-engaging in a serious way with official creditors."

One unfortunate aspect of the article is that the reference to the Jamaica Debt Exchange is clearly inaccurate. The article refers to an accord to swap US $7.8 billion of local bonds in 2010 for securities with longer maturities and lower interest rates that "fell apart after the previous administration failed to share information with the IMF for over a year." The JDX, which is the "accord" referred to, has actually been even more successful than originally planned, with projected interest costs of $120.7 billion for the full fiscal year ending in March (as recently revealed in the supplementary budget) being more than $10 billion below the $131 billion originally budgeted in April 2011, and about $60 billion below interest costs in the crisis year of 2009, or overall savings of significantly more than the 3per cent of GDP projected at the time. It is the IMF agreement that is "off track", as no IMF tests have occurred for over a year, and for all practical purposes the old IMF agreement has already ended as we await the negotiation of a new agreement.

Encouragingly, at the end of trading on Friday, despite the Bloomberg article having been one of its top ten most popular during the day, Jamaica's Eurobond prices were unmoved. Perhaps Jamaica can use the huge international reach of the article to advertise the very positive Jamaica Investment Forum, at which there were many excellent presentations including that of the Prime Minister.


Source:
By Keith Collister
Jamaica Observer
Sunday March 4, 2012

http://www.jamaicaobserver.com/business/Jamaica-not-seeking-a-Greek-style-bailout_10944716#ixzz1oFyuEu6U