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Banks facing billion-dollar hit


Banks facing billion-dollar hit

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The balance sheets of three of Canada’s leading commercial banks in Barbados may take a billion-dollar hit as a result of the suspension of loan payments to foreign lenders.

The Canadian Imperial Bank of Commerce, Royal Bank of Canada and ScotiaBank were among the largest lenders to the Freundel Stuart Administration in the last decade.

Following the May 24 election which saw the Democratic Labour Party unable to win a seat in the House of Assembly, the Mia Amor Mottley Government said because of the financial problems it inherited it didn’t have a choice but to default on the repayment of loans.

According to a published report in the Toronto Globe & Mail, one of Canada’s largest national newspapers, the default is expected to dig a deep hole in the balance sheet of First Caribbean International Bank, CIBC’s arm in the region, which had a (US) $506 million or (BDS) $ 1.1 billion “exposure” to the Barbados Government “through securities and loans” made in recent years.

“A Government default in Barbados has put Canadian banks at risk of write-off, with Canadian Imperial Bank of Commerce, particularly exposed to the Caribbean country’s troubled finances through loans and securities worth a half-billion US dollars,” the Globe & Mail said.

The default which triggered a steep downgrade of Barbados’ Wall Street credit rating by Standard & Poor’s falling from “CC” to “Selective Default”, may turn out to be exceedingly costly to the three Canadian banks because the exposure of RBC and ScotiaBank hasn’t been disclosed.

Barbados now has one of the world’s largest debt profiles, amounting to more than 170 per cent of GDP, most of it accumulated after the 2008 and 2013 elections and the effects of the “Great recession”. The Stuart Government is being portrayed in North America as the architects of the near collapse of the economy.

As Ted Kidladze and James Bradshaw, Globe & Mail analysts, see it, “the default not only portends a weak economy for years to come, limiting bank revenue growth, but also directly affects the lenders’ balance sheets”.

 What has aggravated the Canadian banks’ financial exposure was a Barbados decision that forced banks “to hold more of their reserves in Government issued securities to fund the deficit. As of January, the requirement was 20 per cent”. (TB)