WILD COOT: Ahead of the game
In a race for downgrades Barbados would win.
Banks in Europe borrow from the European Central Bank (ECB) for onlending such borrowings to their customers. Business has not been so hot of late, and the slowdown is prompting the ECB to lower its interest rate so as to encourage banks to borrow at a lower rate and thus spur economic activities in the European countries. Good idea.
However, the lending rate for the ECB is currently 0.25 per cent. They are thinking of lowering it to 0.125 per cent. Our Government would be happy with that. Perish the thought, since our economy is not the same. Better than that, the ECB may be thinking of lower than 0.125 per cent. It may be thinking of charging banks for keeping balances with it so as to spur the banks to lend to customers and stimulate business.
The thought is that banks would then prefer to lend to customers rather than leave their money with the ECB to incur a charge. But the banks are reluctant to risk lending and provide growth in European countries. If such a charge is instituted, it would be deemed “negative interest”.
The ECB should send its chief executive officer to Barbados as we have a head start with negative interest. Once upon a time, people earned as high as 5 per cent interest for placing their savings in a bank. That interest has been whittled down to 1 or 2 per cent and now banks are charging you to keep your money in a savings or current account.
The thin edge of the wedge has been inserted. If your balance falls below say $500, there is a minimum monthly charge; if withdrawals are made on the account for more than a certain number of times in a month, there is a charge; if a debit card is used for payment or withdrawal on your savings account, then a charge is incurred. Therefore this is negative interest, and we in Barbados can teach the Europeans a lesson. Mario Draghi, the head of the ECB, should come down here.
We copied what was going on in the US in regard to our Central Bank as the investment of our holdings in US dollars sought refuge. There the interest rate hovered around 1 per cent, (part of Central’s Bank’s losses). However the United States had a remedy, same as Japan. They could flood the market with greenbacks and provide businesses with activity. We cannot do so . . . oh yea, beg your pardon! We can increase the Treasury Bills limit to $4 billion, and the Special Loans Act limit to $2.5 billion, we too can flood the market with dollars, Barbadian dollars not represented by taxes, but printed money. Junk, junkier, junkiest.
Money printed by the US is acceptable all over the world. Ours can’t be. It leads to increased deficit, foreign exchange losses, loss of investor confidence as investors are now guided by our B3 rating (down graded three notches), drag on National insurance, loss of punching above our weight and most of all an increase in interest to be serviced.
We had a good economy.
We should learn from the farmer who thought that his hen had a gold mine inside of her. You know the story. Every day she laid a golden egg. He thought that she had a treasure inside of her. (Il crut que dans son corps elle avait un trésor). The old foolish idiot cut her open, (taxes and printed money) looked inside and found that she was the same as all the other hens. Bajans’ insides are now exposed to the world.
People can see that Barbados is not a poor country, for a small economy does not have $8.6 billion of local savings alone – the backbone of a country.
Since 2008 I have been preaching weekly in the DAILY NATION newspaper that this administration has misread the signals of the world economic collapse. It started with the banks and the banks are still playing a fundamental part. Now Government squeezes the banks (taxes), the banks squeeze the people (charges), then the people squeeze the banks (bad debts). Peter Boos calls for a rally by the private sector, Comissiong calls for a fresh election, the Wild Coot is calling. Whatever happens, devaluation is a catastrophic option. There is no known measurement for devaluation. Listen to Sir Courtney.
• Harry Russell is a banker.