WILD COOT: A weighty decision
THIS IS A DECISION that Barbadians must make over the coming months. We either support the Government by investing in the five per cent bonds or we do not.
Over the last seven years or so we have not been given the kind of confidence that tells us that the husbandry of those in charge of the economy has been good, and now we have come to a stage where we need to sink or swim.
Our Central Bank has come to us requesting us to invest in five per cent bonds that will mature sometime in 2020. That date is significant because our present wise men both in the Central Bank and Government may not be responsible for redeeming the bonds.
You see, the problem is this. Regularly the Government, through the Central Bank, offers treasury bills in order to run the country on a month-to-month basis according to its cash flow, as the inflow of taxes is unpredictable. The Central Bank can also take up these treasury bills, but it too has a limit that presumably has been busted. Banks usually tender for the treasury bills and facilitate the Government through the savings that the public entrusts to the banks.
The banks apparently have decided (we do not know if en masse) that they will not buy the treasury bills beyond the amount to satisfy their statutory legal requirement. However, if the Government will pay interest over, say seven per cent or more, they may buy the treasury bills offered for tender. Government is in a bind as it is unable to afford seven per cent for treasury bills in this harsh environment. You recall that the rating agency has criticised the Central Bank for printing money (holding too much in treasury bills).
The public is asked to step in. The Government has not delivered on leadership, as it seems antagonistic towards criticism; it has created an atmosphere of uncertainty. There is scepticism and you cannot blame the public for unbelief. Most people are blue vex about the situation with the university and the hospital, to name just a few. Also the illogic of the tipping fee that is a tax on a tax.
However, what is the Government supposed to do in the light of this stalemate? The Central Bank does not seem to have the testicular fortitude to use the big stick probably because of the fear of confidence by investors. It is asking the public to use a cudgel by moving their savings from the banks and buying bonds.
In any case the Wild Coot predicts that the banks will offer the savings interest rate at .5 per cent and then .25 per cent. In fact, some savings rates will be negative, as I have been saying all along.
The Wild Coot cannot tell people what to do with their money, but as it stands, the Government has to get money to run the country. If you have no income, how can you run your household? It is patently obvious that if the Central Bank does not wish to force the banks to cooperate, then the citizens have to step in, or do we?
There is a need for our own bank to counteract the machinations of the mainly Trinidadian banks that have been calling for market forces to prevail (substitute removing interest from savings – this has been the tour de force of First Citizens Bank from the time it set foot in the island).
The banks have the gall to offer mortgages at 4.99 per cent, the rate locked in for only two years. The difference that faces a mortgagee on a $200 000 mortgage over a 25-year period between five per cent and nine per cent is $510 per month more on the mortgage payment. The difference on a $400 000 mortgage over 25 years between five per cent and nine per cent is $820 per month more on the payment. If you are unable to afford the higher payment now, do not take the mortgage.
My question is, if the Government happens to dry up the available liquidity now with five per cent bonds, and people opt to go to the credit unions as an alternative to the banks for savings, will banks eventually have to pay higher interest rates for savings, according to ‘market forces’? What will happen to loan and overdraft rates? Thus the nine per cent interest for mortgages is a very likely possibility.
But when you say A, you must say B. There is a crisis in Barbados. Maybe the bankers see something that we neophytes do not see. People are caught in the middle of this crisis. We must cogitate and meditate (or percolate) on the words of King Henry II meant for the troublesome priest.