Editorial

A debt downgrade foretold

Sunday, January 27, 2013    

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ONE of the most widely read books by the justly renowned Latin American author Gabriel Garcia Marquez is entitled Chronicle of a Death Foretold. Predicting a death is a no-brainer, because eventually the prediction will come to pass. Predicting that Jamaica's debt would be downgraded by the rating agencies was a certainty under the prevailing circumstances.

The unfortunate analogy goes further. In Marquez's fictional story the whole society knows of the impending killing but nobody does anything to stop it. Similarly, the downgrade of Jamaica's credit rating, like death, was certain to happen, given the debt situation and the unfinished negotiations with the International Monetary Fund. But nobody did anything to prevent it.

A week ago, Jamaica's credit rating was lowered from stable to negative by Fitch, the least influential of the credit rating agencies. At the time of the announcement Fitch stated that its decision was influenced by "Jamaica's rising financing constraints in the context of elevated fiscal and external imbalances. The sustained erosion of the country's international liquidity position has sharply reduced the authorities' manoeuvre capacity to manage external and fiscal pressures, thereby increasing the urgency of reaching a new agreement with the IMF".

Credit rating agencies have been known to be wrong because they practise a speculative forecasting which is more alchemy than economic science. A good example being the downgrade of the outlook of the United States, a case of the triumph of Republican political sympathy over pragmatic prudential analysis.

They failed to predict the global financial crisis, institutions they pronounced sound collapsed, and ones they warned against prevailed. However, in extreme cases, the rating agencies are simply articulating what everybody already knows, as is the case of Jamaica.

It will not be long before similar actions are taken by Moody's and Standard & Poor's. The public is being informed about something of which local and international financial cognoscenti are already fully aware. No panic there, because the local financial and business circles have already made adequate preparations based on a range of scenarios of exchange rate, interest rates and fiscal consolidation.

International financial interests will therefore charge the Government of Jamaica higher interest rates and fees when next it borrows, which could be as early as February.

Apart from planning ahead, the local and international markets have remained calm because Jamaica has always paid its debt, no small achievement given the large share of the budget which is required for debt service. Even when there has been a restructuring of the debt, notably the Jamaica Debt Exchange, participation of creditors was voluntary.

This is in contrast to the default of Argentina, which is still being contested by recalcitrant creditors in the courts of the United States nearly 10 years later. Jamaica's impeccable record of paying its debts has been invaluable in forestalling panic about its debt sustainability. There is no question that Jamaica will continue to pay its debt. Anything else would be financial and political suicide.

Add to all of the calming influences the reputation of Dr Peter Phillips, even when his technical team and the Cabinet have forced him to repeatedly announce yet another date for the completion of the negotiations of the Letter of Intent with the International Monetary Fund. Nobody else in Jamaican politics could have done what Dr Phillips has had to do and be believed.

The downgrade by Fitch does add to the perception that Jamaica's economic situation is deteriorating. While it does not set off panic, it is a reminder that it is past time to set our economic affairs in order.

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