Is Jamaica the Greece of the Western Hemisphere?

(Part 2)

Keith Collister

Friday, January 11, 2013

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IN my first article, referring to Tuesday's now famous Chicago Tribune editorial entitled "Jamaica's Debt Hurricane - The Greece of the Western Hemisphere", I noted a couple of factual errors. These included, firstly, the fact that Jamaica was not the most indebted country in the world (it is the third most highly indebted of rated sovereigns). Secondly, rather than having tried to restructure its debt "with no success", as stated by the Tribune, the Jamaica Debt Exchange had been a success. It had in fact restructured Jamaica's domestic debt, stretching them out "over more years and at lower interest rates" as requested by the Tribune. I also noted that a key difference between Jamaica and Greece was that Greece entered its crisis with a massive primary deficit, meaning that its expenditures were much greater than its revenues even when one excluded interest costs, whereas Jamaica still had a primary surplus, albeit shrinking.

The biggest difference between Jamaica and Greece is that Jamaica has its own currency, whereas Greece uses the euro. This gives Jamaica the option of allowing its currency to adjust to deal with competitiveness problems, unlike Greece which has instead had to endure an extraordinarily painful deflation to begin to regain its international competitiveness. In addition, the Bank of Jamaica has the ability to print its own currency giving it more options than Greece in repaying its domestic debt, at least in the short run.

Nevertheless, the gist of the Tribune editorial is correct. Jamaica is caught in a debt trap, meaning that government debt is so high that it is depressing the growth of the economy, and is in the long run almost unserviceable at our current rate of growth.

At first glance, the Tribune appears somewhat confused when it argues that "Jamaica needs a restructuring, and a bailout with significant debt relief", but then also argues against default, stating that "defaulting on its debt would ruin Jamaica's prospects for years to come". However, although not explicitly stated in the editorial, it is possible to tease out what the Tribune probably means.

As has been said before, unlike the debt of some other countries that have defaulted in recent times (including Iceland, Grenada, Seychelles, and Belize), Jamaica's debt is virtually all owned by Jamaicans, much of it institutionally through its banking and financial system. So unlike Iceland, for example, where foreigners bore the vast majority of the losses, almost all of the losses would have to be borne by Jamaicans. In all the other cases mentioned, default did not threaten the domestic banking systems (who did not own large amounts of the bonds the Government defaulted on), or in Iceland's case the local banks were already bust from their reckless international lending, and were taken over and recapitalised by the government, without their government accepting their huge foreign liabilities.

The Tribune clearly understands this, which is why it only mentions restructuring, and bailouts with significant debt relief. So, for example, a 10 per cent haircut (meaning reduction in the principal of the debt), would neither solve Jamaica's debt overhang (it would require a much deeper reduction to do that), but would severely damage the capital base of the financial sector (requiring recapitalisation in some instances), likely lead to a significant devaluation (hurting the average worker at least as much as any wage freeze or even wage cut), and initially lower growth (and therefore our long-term debt sustainability) as banks can't lend without capital. It would be essentially the worst of both worlds. As Jamaica does not currently appear to have a European Union (Germany) willing to write a large recapitalisation cheque, then this does not appear to be an option we can currently consider. More importantly, it would not solve the long-term problem as any cut in the debt stock of this magnitude could easily be offset by fiscal overruns even in the life of the anticipated four-year IMF agreement.

Alternatively, there are a number of measures including an aggressive divestment programme, the reimposition of the reduced taxes on fuel, a revenue positive tax reform, privatisation or a concession of customs to an entity such as Crown agents to raise the collection of customs revenue, the aggressive collection of land taxes (selling liens to private collectors if necessary), the temporary imposition of taxes on Caricom imports as a balance of payments measure, accelerated implementation of the public sector transformation plan, or the transfer of the employer contributions of the NHT to the Ministry of Finance (perhaps through a temporary increase in education tax), which singly or together a determined government can use to meet the fiscal gap of between one to two per cent of GDP in annual revenues that appears to be holding up the IMF deal. All would be better than further damaging confidence through a default on the debt, but they do require political will.




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