ST GEORGES–Grenada's new government has appointed advisers to seek a restructuring of its US$193 million 2025 bond as part of a wider overhaul of the island's finances, which were devastated by hurricanes in 2004 and 2005 and which have been unable to recover during the wider financial crisis.Grenada is the latest Caribbean country to embark on debt restructuring, following Belize and Jamaica, which both initiated talks with creditors this year.
Prime Minister Keith Mitchell returned to power last month with a mandate to sort out the island's economic situation."The global financial crisis has taken a heavy toll on the country, and aggravated the severe debt overhang that continues to weigh down our economy," said Mitchell, whose government has appointed White Oak Advisory and law firm Cleary Gottlieb as advisers. Both have been advising Belize on its debt exchange.
Mitchell added: "It is now time for Grenada to confront the fact that it cannot continue to pay its debts on current terms, and that the restoration of growth requires the debt overhang to be resolved. We need a fresh start, and it is therefore imperative that we approach our creditors promptly to discuss an orderly restructuring of our liabilities."
With further borrowing no longer a viable option, Grenada confirmed recently that it will did have the resources to pay the coupons on its US Dollar and EC Dollar Bonds 2025 which were due on March 15. The Government does not expect to have the funds to do so within the relevant grace periods."Notwithstanding Grenada's aggressive efforts to achieve macroeconomic stability, public finances are currently unsustainable," the Greanda government said in a statement.
Both the US Dollar and EC Dollar Bonds are based on step-up coupon structures. The coupons increased from 2.5 per cent to 4.5 per cent in September 2011, and are scheduled to step up again, to 6.0 per cent, in September. Further step-ups are scheduled for 2015 and 2017, with the final step-up, to 9 per cent, scheduled to take place in September 2018.
The island's economic recovery from Hurricanes Ivan and Emily was cut short by the onset of the global financial crisis, subsequently causing a contraction in Gross Domestic Product that averaged -1.2 per cent a year from 2008 to 2012.By way of comparison, the annual growth assumption that underpinned Grenada's 2005 debt restructuring–a restructuring that involved no haircut to the principal of the debt stock–was 4.7 per cent per annum.
"This crisis has had a dramatic effect on the country and on its public finances, marked by a decline in economic activity, investment levels and tax receipts. The economy has also endured a sharp reduction of grants and concessional financing, together with losses brought about by failures in the regional financial system."
Grenada has responded to these challenges in part by introducing new taxes and reining in expenditure. In July 2011, the IMF concluded that public expenditure had fallen significantly, in both real and nominal terms, from its 2007 level.
"With the economy and revenue base shrinking in real terms, these expenditure cuts have not been sufficient to place the public debt on a sustainable footing. Expenditure cuts have also limited the Government's countercyclical effort and ability to provide a safety net for the more than one in three Grenadians in the workforce who are now without work," the statement added.
CMC