Barbados Prime Minister Mia Mottley is calling for the formation of a Caribbean Liquidity and Resilience Facility for small to medium-sized countries in the wake of the novel coronavirus economic fallout.

Declaring that the “international financial system is broken”, Mottley said there needs to be systematic global solutions to a systematic global problem.

“One crucial stepping stone I would like to share with you is the idea of a Liquidity and Resilience Facility developed by Vera Songwe, Economic Commission for Africa. Vera’s solution – and she has been working with us and we with her – addresses the illiquidity of the government bond markets for small and mid-sized countries,” Mottley was quoted in Barbados Today. She was addressing the recently held meeting of the Caribbean Development Roundtable of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC).

Songwe is an economist and banking executive from Cameroon. The Resilience and Liquidity Facility refers to a facilty limited to high-quality asset managers to repo (repurchasing agreement) bonds that finance resilience and infrastructure. It will allow the issuers of these bonds to benefit from significantly lower cost per capital.

According to Mottley, the facility could be applied in the Caribbean region as a safety net for when it faces natural or man-made disasters.

“When investors buy our bonds, they do not expect that it would be a quick and easy effort for them to sell them. They have to be in it for the long haul and prepare to take all the risks with limited prospects of getting out when they want to, or even hedging some of the risk,” she explained.

“Consequently, investors want to be compensated for this illiquidity. The cost of borrowing for middle-income countries is markedly higher, even when they are fiscally responsible. We borrow, as you know, at seven to eight per cent today when larger, rich countries with similar fundamentals borrow at three per cent, two per cent or less. This not only reduces our capacity to invest, but it also limits our budgetary responsibility, it also disincentivizes budgetary responsibility. At the heart of Songwe’s facility is a repo for the Government bonds of middle-income countries,” she contended.

Mottley added that the facility can lower the cost of funding and infrastructure projects by up to two percentage points, which would then have a meaningful impact.

“At the centre of a repo agreement is a short-term cash loan, often between a central bank and a private asset manager owning a security. The asset manager borrows cash from the central bank, with the security acting as collateral for the loan. In most repos, the credit quality of the security is strictly limited and so the quality of the asset manager doesn’t matter so much. If anything goes wrong at the asset manager, the central bank of course can sell the security. The repo markets are narrow in terms of eligible instruments but wide in terms of who can play,” Mottley argued.

“We in Latin America and the Caribbean region are stuck in a middle-income country trap all the while. Middle-income countries of mid-to-small size are even more dependent on the global economy than the poorest or the largest. So we are acutely vulnerable to systemic shocks like pandemics and climate change,” she said.

In her opinion, the system today provides liquidity when it is needed and takes it away when it is not. She stated that, for too many, it is not fit for purpose.

“But being middle-income and mid to small-sized, we do not have the tools that large, developed countries have to respond to these shocks that we did not cause. We cannot engage in quantitative easing or a massive fiscal stimulus. The middle country trap is being even more exposed to shocks than others, and equally less capable of absorbing them. We do not have an international system of private financial flows that can diversify our risks and smooth these turbulences.” she said.