WILD COOT: Buying bonds a sin? No!
I SAID IN AN ARTICLE, An Invidious Position, dated 4/5/15: “This five per cent bond that savers are expected to take up has an attractive rate of interest and people may very well support the Government. After all, it is our country.”
In an article captioned Doing What Cyprus Did, I said: “All that glitters is not gold. What the Cyprus government did was to capture part of the vast savings of its people in order to repay debts that the country (substitute people) owed.”
My opposite columnist on Monday, Louise Fairsave, did a wonderful job in explaining the issue; purchase, tax benefit, interest and payment schedules of bond issues, including the present issues. You need to hold the bonds for the full time in order to profit from the 5.5 per cent.
The present bond issue comes at a time when the Central Bank has given permission for banks to reduce interest rates. The numerous savers in Barbados could now avail themselves of an alternative to the skimpy bank interest rates that banks greedily hastened to offer.
Banks will have their comeuppance in due course when they want to lend or possibly when lending is undermined by want of savings. Do you think that the banks have been ‘samfied’? The Wild Coot does. More and more savings will be tied up in bonds.
I raise two questions. While the banks are now flush with money and are not interested in lending owing to the “unattractive climate”, are they envisaging that this will last for five years? Will the Central Bank, giddied by the issue of the first and second $10 million and third of $25 million in bonds, continue to issue more in bonds? Are the bonds satisfying the appetite of the Treasury? Will the bonds mean growth?
Why the Wild Coot quoted from his article at the time of the Cyprus crisis is that if we examine it carefully, we will see that we are doing the same thing. So far it is not considered a haircut because of the voluntary nature of the transaction. Cyprus savers were given bonds for their savings. It is a matter of rhetoric of the authorities.
While the Wild Coot might not be forced to drink Gramoxone, I am not sure what the purveyors of sophistry might be planning. Socrates was given hemlock and he drank it. He saw dangers in rhetoric. Plato later spoke in his defence. Surely my grasp of elocution cannot compare with that of those ancient fellows – including Saint Paul with his numerous persuasive letters, and Jesus (remember the sermon on the Mount. I do not like chapter 5 verse 31 – whoever marries a divorced woman commits adultery.
Be that as it may, my contention that the eventual payment of these bonds in 2020, when we shall see the outcome of the rhetoric, may not be the job of the same politicians to find the money to repay the bonds. This cannot be an inconsequential factor. Perhaps the governor of the Central Bank may be relaxing blissfully on some idyllic island.
Tax collected is not repayable to the citizens, but bond issue is a one-time increase in debt. What we see now is that our Government has exploited a way of raising money instead of by taxation. The volume of bonds liability will increase our debt portfolio.
If we have to cut back on services now, what happens when our debt liability is increasing? Question: Is there a sinking fund being established to take care of repayment in 2020? If not, how are the bonds to be repaid? Is this then a deliberate policy of repaying bonds with new bonds?
The direction of the financial vehicle in which we are travelling certainly raises questions now, and the commercial banks should be the ones to question it. Already one banker has separated himself from the lot and stated that the model is broken.
Bonds have been used in the past to cover unscheduled gaps in the Government’s cash flow. However, the present use appears more structural and part of Government’s income stream. An income stream that is dependent on a borrowing at this stage should be designed to get us out of the hole in which we are.
On top of all of this, there is the perplexing mouthing from the Central Bank that links the exportation of foreign exchange in doing business to having tax clearance. The warning goes out that the next step is to link tax clearance to going from here to St Lucia or Miami. The measures have been tried in Guyana and Jamaica and have failed miserably. There are many ways to export foreign exchange, including not importing it. Confidence and freedom go hand in hand. We have other sin problems.
Harry Russell is a banker. Email [email protected]