EVERYONE knows that Jamaica routinely shatters world records on the track. It has now also shattered world records in terms of debt management, according to Citibank’s Gregory Makoff, one of the international advisers

on the Jamaica Debt Exchange (JDX).

In this path-breaking deal, the government of Jamaica surprised even the savviest local market players by swapping the entire national domestic debt of approximately $700 billion for lower interest, longer-dated bonds.

Makoff observes “the 99.2 per cent success rate of the JDX is an off-the-charts success compared to international precedents. This result is a testament to the sophistication and commit-ment of the local market participants who worked together to forge a community-wide consensus on the complex mix of policy and financial solutions embodied in the JDX and the

IMF programme”.

Citibank’s local head, Peter Moses, agrees. “The settlement of the JDX has been completed, and by all measurements it has been an immense success. The JDX was a key element of the government’s economic programme that was developed and presented to the IMF and other multilaterals. Citibank is very pleased to have been given the opportunity to work with the government on this important transaction and recognises

the unprecedented support provided by all constituents in the financial community. “

Unlike most similar debt exchanges that have taken place internationally, the outstanding success of Jamaica’s debt exchange, with an almost 100 per cent participation by local investors, is not due to coercion. Whilst there were vague warnings from government sources that they wouldn’t allow “free riders”, no specific consequences of not accepting the offer were spelt out in the debt exchange offer document.

In fact, virtually all the local investors agreed to the transaction without comment. Some, such as Jamaica Money Market Broker’s (JMMB) Managing Director Keith Duncan, expressed vocal support despite being one of the largest holders of government domestic debt. Speaking at the launch of the debt exchange, Duncan observed that he had “felt almost ashamed” that the financial sector had not yet made its contribution after observing the severity of the Christmas tax package required by the IMF as a precondition for an agreement.

It is very difficult to imagine a transaction like this happening anywhere else, without any significant capital flight or movement in the Jamaican dollar. The enormous success of the exchange appears to reflects a deep consensus by local investors, and the private sector generally, that a strong package of economic reform (and the financial engineering implicit in the debt exchange) had the best chance of breaking Jamaica out of its current debt trap.

Indoubtedly, it helps that the whole process will be overseen by the IMF. The unusually long period of the IMF negotiations, a result of the IMF’s need to see a credible plan to address Jamaica’s enormous debt problem, had the important advantage of solidifying this consensus on the need for lower interest rates and economic reform. The issues surrounding the debt were debated in the newspapers and on the

radio in an unusually transparent fashion.

The IMF had also wisely adopted Jamaica’s own economic reform programme, increasing the chance of success. Moreover, the concept of the need for a trade-off was there long before the IMF got involved. The spirit of shared sacrifice embodied in the debt exchange also benefits from previous attempts at the creation of a social partnership, such as that of 2003. What is different this time around is that the debt exchange conclusively an-swers the consistent question of the public sector unions in the 2003 to 2005 social partnership attempt, namely “what was the private sector giving up?”, in return for their acceptance of a two-year wage freeze.

Timing of the deal

Citibank was originally hired in 2008 to look at the reprofiling of Jamaica’s debt. In March of 2009, JMMB led a group of local money market players in advocating a debt swap to give the government of Jamaica some breathing space, similar to an initiative in January 2004 during a previous period of fiscal crisis. The initiatives to find a solution for Jamaica’s debt problem were merged, with the final JDX structure resulting from many consultations with the market, and later with the multilaterals, to integrate the debt swap savings into the medium-term economic plan.

Jamaica’s huge debt overhang meant that the IMF would ultimately require interest rate savings of at least $40 billion, and the extension of the domestic debt maturities, to give Jamaica some breathing space.

Jamaica’s

low-interest-rate man

Minister Shaw had a critical role in mobilising extra-ordinary multilateral support, thereby giving Jamaica a once- in-a-generation opportunity to address its debt overhang. According to an inside source, when the IMF offered US$300 million, Shaw asked for US$1 billion. When they offered US$350 million, he asked for US$1.5 billion. In the end, Shaw negotiated an unprecedented financial sup-port package of over 20 per cent of its GDP over a two year period, approximately half of which is upfront. The package includes US$1.25 billion from the IMF, whilst more than another US$1 billion is in the process of being finalised from the IDB, World Bank and Caribbean Development Bank. This support reduced the risks inherent in the exchange, a key factor in the financial sector’s eventual acceptance of the deal.

At his press conference with the European Union (EU) on Wednesday of this week, where Jamaica was granted $2.2 billion in budgetary support under the EU’s Fluctuation in Export Earnings programme, Shaw noted

that his critics had said

that he “couldn’t get cheap money”.

However, between last week and this week, as part of the financing package, Shaw has signed loans of US$415 million. The IDB has continued its extraordinary support, lending Jamaica US$215 million at 1.23 per cent. Just as encouraging is the thirty-year variable rate loan from the World Bank of US$200 million. Not only is the interest rate an amazing 0.63 per cent, there is a five-and-half-year grace period on principal repayments. The loan was approved on Tuesday, signed by Minister Shaw on Thursday, and disbursed on Friday morning.

Of course, this cheap money only gives Jamaica the opportunity to address its economic problems. Shaw clearly recognises this, arguing at the press conference that while the JDX represents an important milestone in Jamaica’s journey towards good economic health, and expressing his extreme gratitude to the bond-holders, banks and other stakeholders for their sacrifice and support, it was not a goal in itself.

“Make no mistake about it, the only sustainable way forward is for us to earn our way to a better economy; an economy with low interest rates, significant investment, substantial foreign exchange generation, improved produc-tivity and job creation.”

In a Financial Times article on Thursday “Jamaica agrees to IMF turnaround plan”, in what appears to be a further nod towards creating a true consensus on economic policy, Shaw noted: “It is time for us to stop apportioning blame. We need to look into the mirror and step up. We need better governance, we need to cut out crime and corruption, and to increase investment and human productivity. That is our vision.”