What’s up with all the downgrades? Dr Justin Robinson explains

Senior Lecturer in Management & Dean of the Faculty of Social Sciences at the Cave Hill campus of the University of the West Indies, Dr Justin Robinson, has sought to explain credit ratings to the Barbadian public, in light of the latest downgrade by international ratings agency Standard & Poor’s (S&P).

Robinson said part of the confusion around credit ratings is that “we have made them into something they are not”.

He notes that credit rating is extremely important because it can affect the ability of the Government to borrow and the terms and conditions it can borrow under

But he said the rating focuses on the issue of the ability of the government to service its debts when they fall due, as a way to provide guidance to investors in government bonds, not to pronounce on the overall health or well-being of the economy, or the nature of government’s economic policies.

Here is the full text of Dr Robinson’s paper:

As I move around Barbados I get a lot of questions and queries about credit rating downgrades, what they mean, when will they end, are there lower grades, do they mean the government is doing the wrong things and so on? I think part of the confusion surrounding credit ratings comes from the fact that as a society we have made credit ratings something they are not. I thought I would write down a few clarifying points, and hope I don’t succeed in confusing people even more.

A sovereign credit rating is an opinion (issued by a rating agency) on the likelihood a country will default on its debt.  Banks, Insurance companies and other investors who lend money to governments, find these credit ratings useful in deciding whether or not to lend to the government, what interest rate to charge, and so on. The credit rating focuses on the ability of the government to service its debts when they fall due, as a way to provide guidance to investors in government bonds, not to pronounce on the overall health or well-being of the economy, or act as a sort of referendum on government’s economic policies.

According to S&P Global Ratings “An obligation rated ‘AAA’ has the highest rating assigned by S&P Global Ratings.” “The obligor’s capacity to meet its financial commitments on the obligation is extremely strong.” I want to suggest that this rating can be interpreted as the agency saying to investors that they cannot envisage a reasonable scenario, in any reasonable time frame, where the borrower (the government) would be unable to meet its obligations.

Barbados’ current rating is CCC.  According to S&P Global Ratings “An obligation rated ‘CCC’ is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation.” “In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.”  I want to suggest that this rating can be interpreted as the agency saying to investors that there are a number of reasonable scenarios under which the Government of Barbados may be unable to meet its obligations to bond holders.

The last time we had an investment grade credit rating was in 2012.  In 2012, the fiscal deficit was 8.5% of GDP and the economy grew by a meagre 0.3%.  Today, with the economy projected to grow by around 1.75% and the deficit expected to be 4.0% or less, we have yet another downgrade.  How does this make any sense?  I want to suggest that despite these improvements and the aggressive budget, there is still a high level of uncertainty about the government’s ability to pay its debts because of the lack of financing options for the government, and especially the issue of “Rollover Risk,” hence the continuing downgrades and negative outlook.

One of the major reasons governments fail to pay their debts is what is called “Rollover Risk.”  For most normal humans, if you borrow $500,000 for 30 years, each payment you make will include interest payments and a repayment of part of the principal.  Therefore, at the end of the thirty years, the loan is fully paid off and you are fine.  In the case of most government bonds, the scenario is somewhat different. If a government borrows $50 million for 30 years, over the next 29 years the government will only pay interest on the $50 million.  However, in year 30, the government has to make the final interest payment and pay the full amount of the principal.  In the majority of cases, the government will not repay the $50 million out of its own funds, it will seek to borrow a new $50 million by selling new bonds and use that money to pay off the old loan and restart the loan cycle.  That is called “Rolling Over” the bond.

In reality, there are very few governments, if any, that could repay the principal on their bonds when they fall due out of their own funds.  If governments are unable to rollover their bonds consistently, they will be unable to make their principal payments. For example, if the US congress does not periodically raise the debt ceiling to allow their government to borrow more money, the USA will likely default on its debts. In fact in August 2011, Standard and Poors lowered the credit rating of the United States from AAA to AA, after it took a last minute deal to raise the debt ceiling.

The major buyers of government of Barbados bonds are Commercial banks, Insurance Companies and the National Insurance Scheme.  For a variety of reasons, over the last few years in Barbados, there is great uncertainty over whether or not Commercial Banks and Insurance Companies will roll over their existing Government of Barbados bonds, and even greater uncertainty over whether they will provide any new long term financing to the Government of Barbados through the purchase of Bonds.  The National Insurance Fund’s surpluses are largely reduced, hence, while the NIS will likely rollover existing bonds, the amount of new financing it will be able to provide by buying Government of Barbados Bonds is likely to be very limited.

In Barbados, bonds valuing hundreds of millions dollars likely mature each year.  These bonds were issued 1, 5, 10, 15, 20, 25, or 30 years ago by many different administrations.  The uncertainty about the rolling over of existing bonds and the ability of the government to borrow new money is at the heart of the credit rating challenge for Barbados, along with the high level of debt and low reserves. Until the Government of Barbados can again reliably borrow money, either as a result of funding though an IMF program, Commercial Banks and Insurance Companies’ again exhibiting a willing to consistently roll over debt and provide new financing, or there is access to some other reliable consistent source of funds, the financing challenges will remain, and with it a high level of uncertainty about the government’s ability to pay its debts, which is what the credit rating measures.

The government’s ability to borrow is key to the functioning of a modern economy.  At present, that artery is now blocked in Barbados and needs to be unclogged, either through the financing and credibility that comes with an IMF program (with the bitter conditionalities of course), a policy mix and/or dialogue that brings the Commercial Banks back on board (the recent attempt to balance the budget does seem to have moved the banks), or through government finding some new source of reliable financing.  In fact, the major cause of the decline in the foreign reserves is the fact that we have not been able to roll over foreign debts when they have matured and we have been unable to attract new foreign financing.

I want to repeat that I think part of the confusion around credit ratings is that we have made them into something they are not.  The credit rating is extremely important because it can affect the ability of the government to borrow and the terms and conditions it can borrow under.  However, the rating focuses on the issue of the ability of the government to service its debts when they fall due, as a way to provide guidance to investors in government bonds, not to pronounce on the overall health or well-being of the economy, or the nature of government’s economic policies.

27 Responses to What’s up with all the downgrades? Dr Justin Robinson explains

  1. Helicopter(8P) September 30, 2017 at 1:13 pm

    A good and informative piece of economics litrature!

    Reply
  2. John Everatt September 30, 2017 at 1:46 pm

    Dr. Robinson – In the case of Barbados being downgraded to CCC rating would not that rating indicate an unhealthy economy? Would a AAA rating not indicate a very healthy economy? Your point seems to be that a lower rating indicates that the ability to raise the funds to repay these loans in questionable. What other reason could there be to question the ability of a government to repay its loans other than its ability to borrow funds to repay these loans?

    Reply
  3. Tony Webster September 30, 2017 at 2:15 pm

    De Mighty Sparrow’s version of these exceptional fiscal circumstances, was much clearer, and more ( much more) entertaining. After de Americans gone, Sparrow ( China ,or de I.M.F.) tek over, and effin you ketch DEM ( sorry, dem) now…”you can have dem (us) all for nuttin'”.

    In the interests of relevance and of context, remind me please exactly waht we spent $40 + million celebrating last year.

    Reply
  4. Greengiant September 30, 2017 at 3:19 pm

    If you all don’t understand the process by which rating agencies arrive at their grading or assessments then I will send a rocket scientist to explain.

    Dr. Robinson I thank you for helping those who have been placed in panic mode by the combination of rating agencies and those on the ground with purely political motives for speaking publicly on the ratings and it’s consequences for Barbados.

    Reply
  5. Loretta Griffith September 30, 2017 at 3:20 pm

    Contrary to Mr Webster I am very glad we had a 50th anniversary celebration. Fifty of anything calls for a celebration. Dammed if you do and dammed if you don’t. We are not a banana republic. Bare hypocrites masquerading as non partisan.

    Reply
  6. Carson C Cadogan September 30, 2017 at 3:38 pm

    Standard & Poor has also said that the Barbados Labour Party is a fractured political party.

    How does that factor into this ratings gibberish?

    Reply
    • hcalndre September 30, 2017 at 8:55 pm

      @ Carson C Cadogan; BLP being a fractured party is to do with the 20 downgrades. The reason why the DLP “Eager 11” have not made anymore noise is that they probably was told that make themselves right first and country after.

      Reply
  7. Tobias Worrell September 30, 2017 at 4:07 pm

    It continues to amaze how we can be so hell-bent on criticizing that we ignore simple elucidation. A short pause and a review of Dr. Robinson’s submission, would bring us to a place of better understanding thereby removing the erratic responses to results such as these. The dean’s presentation is timely and accurate but it interferes with those whose vocation it is to create confusion and to keep those hard positions devoid of respect or regard for truth.
    THANK YOU DR. ROBINSON.

    Reply
  8. The Negrocrat September 30, 2017 at 5:57 pm

    Loretta Griffith, you are either ignorant or delusional.
    Paying our debts is more important that a celebration.

    Reply
  9. Waiting September 30, 2017 at 6:48 pm

    I am just a simpleton and appreciate the explanation given but I will prefer to have AAA than CCC regardless of what I just read. If we were at AAA some time ago why are we at CCC now? Hope we don’t get to DDD or Devalue De Dollar; I think the sinker will jump ship before that happens I understand by resigning.

    Reply
  10. ebaje September 30, 2017 at 7:22 pm

    This article seems contradictory. The author contends that the ability to borrow is key to a “modern economy” and that in Barbados this ability is blocked and needs unclogging. The author further argues that the “credit rating is extremely important because it can affect the ability of the government to borrow and the terms and conditions it can borrow under”. Therefore it is logical to conclude that with the latest downgrade to CCC, our ability to borrow has been further reduced and the terms and conditions for borrowing even more onerous. Based on the author’s arguments, we have lost/losing the key to a “modern economy”. Contrary to what Dr.Robinson is selling, in my humble opinion, losing such a “key” and a lack of confidence in government’s ability to service its debts infer our economy is unhealthy and government policies are wrong.

    Reply
    • Tom October 1, 2017 at 3:23 pm

      ebaje you are spot on.

      Reply
  11. Loretta Griffith September 30, 2017 at 7:48 pm

    The negrocrat based on your assessment I am just displaying my abysmal ignorance like you. You have an opinion and I also have one. I am one who paid my taxes and can speak freely in the country in which I was born so long as I don’t slander anyone or malign their character. I am above that, I deal with issues not Ad Hominem.
    All of us want better for our country. I was never a sycophant nor never will be. I call a spade a spade. I do not play to the gallery, neither do I hang my mouth where the soup is dropping.
    They are two things I value highly, my self worth and my integrity.

    Reply
  12. Tony Webster October 1, 2017 at 5:30 am

    @ Loretta:my dear, just cupple li’l questions:
    1. Do you think there is a scintilla of a connection, between turning on the $40m+ tap last to celebrate, and an imminent general election?
    2. What exactly, is meant by “opportunity cost”?
    3. As a sane person, do you spend money you either do not have, or cannot afford? Sorry, I mean YOUR OWN money. Effin you spending other people’s money…I would rush to agree: lick it out!

    PS: Bossman said the celebration budget was $7M…but a little birdie on a high perch, tell me it is $40 M…and bills still waiting dey to be paid!

    Reply
  13. Veroniva Boyce
    Veroniva Boyce October 1, 2017 at 5:59 am

    Oh Lord, more Long Talk..

    Reply
  14. Justin Robinson October 1, 2017 at 7:38 am

    I do think there is much cause for concern and even panic. Despite the measures and improvements in growth and the deficit, we still cannot unclog the credit markets. The government still cannot access financing, which is what I think the downgrades reflect

    Reply
  15. Justin Robinson October 1, 2017 at 7:46 am

    ebaje, I understand your logic and you may well be correct. I don’t know what you think I am selling. I am simply saying that a credit rating focuses on the ability of the government to pay. If we had zero unemployment, 10% growth and the government decided to undertake a forced debt restructuring we would likely get downgraded.

    Reply
  16. Anton Brown
    Anton Brown October 1, 2017 at 9:53 am

    Look, I wish some of these so call educators will stop with the propaganda them feeding the people. Stop fooling and misleading people. In simple terms a S&P downgrade of CCC means more than like the borrower can’t pay back the creditor and as a result securing a loan becomes impossible ,unless you are will to put up something more valuable than the money you borrowing if you manage to get the loan.
    Example- I make $30,000 a year ,but am in debt $60,000 and would like to borrow $60, 000 cash. Base on my current income there’s no way I am securing a loan because bank already see I am
    Negligent, income is lowered than debt, Imishandle money and I really am not worthy of a loan. Bank then ask besides income, what do I have as value to put up as coletteral incase I can’t pay back and I say to the bank ” I have a home value at $120,000. Bank say ok, I will give you a loan with a 5 year repayment if you default- I keep your house.
    Sorry professor but you are not truthful in your explanation and the people of Barbados should worry.
    Simple terms- Barbados owes more money than it currently have… bonds may soon be worthless so what are they going to put up for collateral ( here’s where the selling off of Barbados comes).

    Reply
  17. Peter Lawrence Thompson
    Peter Lawrence Thompson October 1, 2017 at 9:57 am

    This is the important conclusion of Dr. Robinson’s paper:
    “The government’s ability to borrow […] is now blocked in Barbados and needs to be unclogged, either through the financing and credibility that comes with an IMF program (with the bitter conditionalities of course), a policy mix and/or dialogue that brings the Commercial Banks back on board (the recent attempt to balance the budget does seem to have moved the banks), or through government finding some new source of reliable financing.”

    Let me put this in plain language: We now have absolutely no choice but to go to the IMF in order to rollover our debt and they will impose very harsh conditions. The banks will not finance the government and there are no new sources of financing.

    Reply
  18. Harry October 1, 2017 at 1:11 pm

    This Govt operates on “smoke & mirrors”, a Minister of Finance who has no Finance training or qualification ( check the DLP website), a Prime Minister soundly asleep at the wheel and we wonder why we are in the position we are in.

    Reply
  19. Tony Webster October 1, 2017 at 1:11 pm

    @P.L.T: touche! Up the Greek creek, with only a half-broken paddle. Why do I remember recent Greek experiences? Dunno. At least, the Greeks had friends and family!

    Reply
  20. RHB October 1, 2017 at 4:38 pm

    There may be no direct connection between the rating and the economy but there is a very strong indirect connection. A well run economy and government would NOT find itself in a position where its ability to repay or refinance its debt was in question!

    Reply
  21. Lorenzo October 1, 2017 at 5:01 pm

    Loretta Griffith the only person who claims they are non partisan is you and yet all of your contributions defend this current Government,is this a coincidence or you another Dem yardfowl feeding at the trough.How can you justify spending $7 million Dollars in a year long celebration when you canget regular garbage collections ,regular Buses,problems at the Hospital ,the roads in a terrible state and you could waste that amout of money,whereby ,a week celebration would have sufficed.You have to be crazy or don’t care about your country ,only party.

    Reply
  22. Milli Watt October 1, 2017 at 5:47 pm

    I understand why dis man got a Ph.d

    Reply
  23. Denis Kellmsn October 1, 2017 at 11:08 pm

    Well said Dr Robinson, the critics who do not understand and want to mass their wrong doings will criticize your analysis without offering any justify alternatives.
    In 2004 PM said during the estimates that any furture leader will have to deal with the reporting of expenditure incurred and not paid like him. These so called experts should go and read what he said in the second reading speeches, also they should read his speech this year when he accused the government of putting in place a program stronger than the IMF.
    With all said above , the facts are that the BLP government was able to play mass with the economy of Barbados without having to account for its disastrous spending by hidding it under the cash basis( only reporting what was actually paid and not spent) while they left the accrual system (what was owed previously, currently paid and owed) for the DLP to service.
    If we were to reverse from the cash basis to the accrual basis under the BLP we would not now be discussing downgrades because of our performance we would have seen the opposite using the cash basis. The reason why you all had so many marches against us is because you all thought there was no need to increase revenue when matching current expenditure , forgetting that we doing deficit financing. Also we have to take into all the servicing of debts used and not serviced by the BLP.
    Can anyone tell me who would sTvh their cash in the banking system grow at less than the inflation rate and join the opposition fight and march for s devaluation of our currency to say I told you so. A devaluation hits cash harder than anything else.it makes financial sense for people with cash to buy government paper than to hold savings. If there is a devaluation these savers would double punish themselves by receiving less when they could have received more and cashing out at must less , meaning losing twice . So good for bad advice from the BLP.
    The country needs not fear , Mr Arthur said that our terms were better than the IMF , which means that if you punish yourselves by not buying our paper and we have to go to the IMF we will pay them while you still have your non performing money saving through spite to self.
    Sensible people follow sensible people and see advise as data and then processing it as information. While fools see information and not data.

    Reply
  24. Denis kellman October 1, 2017 at 11:17 pm

    Justifiable alternatives

    Reply
  25. Vad50 October 2, 2017 at 2:01 pm

    Dr. Robinson,

    Thank you for your explanation. I appreciate the clarity of your explanation.

    Reply

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