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Between the devil and the deep blue sea


Harry Russell

Between the devil and the deep blue sea

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The report in the June 20 BARBADOS BUSINESS AUTHORITY confirms my reading of banks’ situation in Barbados. It also indicates that the Central Bank is not on top of the situation or that its hands are tied.
The fact is that Government is between the devil and the deep blue sea. It cannot afford to pay more for borrowing through the Central Bank by way of Treasury Bills and bonds. Furthermore, its raid on National Insurance funds is becoming embarrassing.
I have been pointing out that Government’s policy not only creates an impoverishing effect on depositors at banks, but in itself creates a problem for banks.
That is why banks burden the public with fees as a means of maintaining profitability.
Allowing banks in a liquid situation to lend more by reducing the statutory requirement is not only risky, but puts the Government in a bind as regards its own borrowing. In any case, if the situation is liquid, such a move is unnecessary.
So what can the Government do? Its foremost intention is to maintain the level of expenditure to promote the “all jobs secure” policy with elections a year and a half away.
Costs
The nearer elections are, the harder it is to trim the public sector as proposed by former Central Bank governor Sir Courtney Blackman. Please refer to my article in the June 6 DAILY?NATION: A Prediction True.
What banks are now seeking therefore confirms what I have been saying these past two tedious years.
Banks will have to refuse deposits in order to avoid reserve requirement costs, and that situation will cause widespread confusion.
However for banks to recommend a new instrument is questionable in a less than vibrant market and an over-liquid situation. Where is the trading going to take place, seeing that there are so few banks here?
Notice that credit unions are not crying out.
How are they coping with paying higher deposit interest rates of 4.5 per cent? Cannot the Central Bank see that or is the Government’s dilemma tying its hands?
Another bank recommendation is that they
be allowed to keep more of the foreign exchange garnered. To agree to that, the stipulation should
be that such foreign exchange be invested in projects in Barbados that have a foreign exchange content, otherwise there is a further loophole for the escape of foreign exchange.
The report also highlighted a request by the banks for a small claims court for debts up to $100 000. This brings sharply into focus two things: (1) that recovery of loans to small and medium-sized businesses is costly under the present legal system; (2) it casts doubt on the viability of something that the Minister of Finance is boasting for the coming Budget, namely that the door will be open to small enterprise. Well, the door has been wide open with all kinds of guarantees by the Central Bank.
 The avenues opened by the late David Thompson have seen little traffic. With banks hurting from small and medium-sized loans, the prospect of new demands on the system are questionable. What about the security bond that the Wild Coot has been touting?
It gives banks a ready way to terminate a failing enterprise. It gives people without security access to banks. It creates additional wealth for the borrower if his venture is successful.
Had Government taken my foolish advice and trimmed its sails in 2008, maybe it would have been able to be expansive in 2012 in time for the elections. My perception is that it will continue to worsen the deficit by continuing to borrow, and the economy will deteriorate.
Banks would remember that mortgage banks in the United States and Lehman Brothers were the main causes of the meltdown. The United States Treasury gave them a rescue package. I suppose we have a backup plan to do the same for banks here!
 

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