For some, it’s now a dis­tant mem­o­ry. For most, you are prob­a­bly not even aware this hap­pened. Hav­ing had to work through it while in­volved with one of the ma­jor com­mer­cial banks in T&T, it is def­i­nite­ly some­thing that as a coun­try we need to be re­mind­ed or be­come aware of.

In June 2018, Bar­ba­dos crossed a line no coun­try wants to cross. With pub­lic debt spi­ralling to around 157 per cent of GDP and for­eign re­serves down to bare­ly five to six weeks of im­port cov­er­age, the new­ly elect­ed gov­ern­ment an­nounced it could no longer ser­vice its debt on ex­ist­ing terms.

What fol­lowed was a com­pre­hen­sive debt re­struc­tur­ing, ef­fec­tive­ly a do­mes­tic de­fault, cov­er­ing both do­mes­tic and ex­ter­nal debt. Do­mes­tic cred­i­tors, in­clud­ing the coun­try’s com­mer­cial banks, in­sur­ance com­pa­nies, and the Na­tion­al In­sur­ance Scheme, were re­quired to ac­cept deep loss­es through prin­ci­pal hair­cuts, coupon re­duc­tions, and mas­sive ma­tu­ri­ty ex­ten­sions. Mar­ket prices for Bar­ba­dos’ bonds fell be­low 50 cents on the dol­lar, wip­ing out much of the val­ue of gov­ern­ment se­cu­ri­ties that dom­i­nat­ed do­mes­tic in­vest­ment port­fo­lios.

The af­ter­math was bru­tal. Banks saw cap­i­tal ra­tios plunge; reg­u­la­tors grant­ed for­bear­ance so in­sti­tu­tions could re­build buffers over time rather than rec­og­nize all loss­es im­me­di­ate­ly. Cred­it dried up as fi­nan­cial in­sti­tu­tions pulled back to pre­serve cap­i­tal. The broad­er econ­o­my con­tract­ed, con­fi­dence evap­o­rat­ed and Bar­ba­dos en­tered a four-year In­ter­na­tion­al Mon­e­tary Fund Ex­tend­ed Fund Fa­cil­i­ty in Oc­to­ber 2018, with ag­gres­sive fis­cal ad­just­ments that in­clud­ed ex­pen­di­ture cuts, tax in­creas­es and wage re­straint.

Rat­ing agen­cies cut Bar­ba­dos to “Se­lec­tive De­fault”. The do­mes­tic debt ex­change launched in Oc­to­ber 2018, but the ex­ter­nal re­struc­tur­ing was on­ly com­plet­ed in De­cem­ber 2019, more than a year af­ter the ini­tial de­fault.

What Bar­ba­dos ex­pe­ri­enced was not unique. I share the sto­ry with you, not so much for the out­come, but so that you can un­der­stand the tra­jec­to­ry. In a Trinidad and To­ba­go con­text, we can­not con­tin­ue on our cur­rent tra­jec­to­ry oth­er­wise we risk a sim­i­lar out­come.

The me­chan­ics

When banks, in­sur­ance com­pa­nies, and pen­sion funds hold large amounts of gov­ern­ment debt, and then gov­ern­ment’s fi­nances de­te­ri­o­rate, the fi­nan­cial in­sti­tu­tions’ bal­ance sheets weak­en. As fi­nan­cial in­sti­tu­tions weak­en, they pull back on lend­ing, slow­ing the econ­o­my.

Slow­er growth re­duces tax rev­enues, wors­en­ing the gov­ern­ment’s fis­cal po­si­tion. The gov­ern­ment then strug­gles to ser­vice its debt, fur­ther erod­ing the val­ue of the bonds the fi­nan­cial in­sti­tu­tions are hold­ing. Each turn am­pli­fies the stress, cre­at­ing a down­ward spi­ral where sov­er­eign risk and fi­nan­cial sec­tor risk re­in­force each oth­er.

That’s where the head­line “Trapped in the Loop” comes from.

Bar­ba­dos walked straight in­to this trap. By 2018, do­mes­tic fi­nan­cial in­sti­tu­tions were heav­i­ly loaded with Bar­ba­di­an gov­ern­ment bonds, treat­ing them as safe, liq­uid as­sets. When the fis­cal po­si­tion be­came un­sus­tain­able, those “safe” as­sets gen­er­at­ed large loss­es. I wouldn’t go in­to the de­tails, but Ja­maica had a sim­i­lar ex­pe­ri­ence pri­or to Bar­ba­dos.

The core vul­ner­a­bil­i­ty in both cas­es is con­cen­tra­tion. Fi­nan­cial in­sti­tu­tions be­com­ing heav­i­ly ex­posed to a sin­gle sov­er­eign bor­row­er - their own gov­ern­ment. Thus, cre­at­ing a dan­ger­ous lack of di­ver­si­fi­ca­tion. In small economies with shal­low cap­i­tal mar­kets, the temp­ta­tion is over­whelm­ing: Gov­ern­ment bonds are lo­cal cur­ren­cy in­stru­ments, liq­uid by lo­cal stan­dards and his­tor­i­cal­ly per­ceived as safe. Banks buy them for liq­uid­i­ty and reg­u­la­to­ry com­pli­ance. In­sur­ance com­pa­nies and pen­sion funds ac­quire them to match long-term li­a­bil­i­ties. Be­fore long, the en­tire fi­nan­cial sec­tor has ef­fec­tive­ly wa­gered its sta­bil­i­ty on the sov­er­eign’s bal­ance sheet.

This con­cen­tra­tion risk gets even more pro­nounced when you have chal­lenges with for­eign ex­change avail­abil­i­ty for ex­tend­ed pe­ri­ods of time be­cause for­eign ex­change is a pre­que­site for in­ter­na­tion­al port­fo­lio di­ver­si­fi­ca­tion.

For the record, Trinidad and To­ba­go’s bank­ing sec­tor had di­rect ex­po­sure to the Bar­ba­dos cri­sis. Two T&T-owned banks col­lec­tive­ly held about 25 per cent of Bar­ba­dos’ bank­ing sys­tem as­sets on the eve of the 2018 re­struc­tur­ing. When Bar­ba­dos re­struc­tured, those T&T banks Bar­ba­di­an ex­po­sures suf­fered val­u­a­tion loss­es and au­thor­i­ties al­lowed time for cap­i­tal buffers to be re­built. I was in­volved in the months of “headache” and un­cer­tain­ty when these is­sues were live.

The les­son is straight­for­ward: when a sov­er­eign re­struc­tures, fi­nan­cial in­sti­tu­tions hold­ing that debt ab­sorb re­al, painful loss­es, even if they en­ter the cri­sis look­ing “well-cap­i­talised”.

T&T

The Cen­tral Bank’s Fi­nan­cial Sta­bil­i­ty Re­port 2024 paints a stark pic­ture of how con­cen­trat­ed our fi­nan­cial sys­tem has be­come in gov­ern­ment risk. Do­mes­tic sov­er­eign ex­po­sures ac­count­ed for 56.5 per cent of the en­tire fi­nan­cial sec­tor’s in­vest­ment port­fo­lio in 2024. In plain lan­guage: more than half of all in­vest­ment as­sets held by banks, in­sur­ers, and pen­sion funds are Gov­ern­ment of the Re­pub­lic of Trinidad and To­ba­go (GORTT) se­cu­ri­ties.

The truth is that you would ex­pect no less for a small is­land econ­o­my with re­stric­tions on ac­cess to for­eign ex­change, es­pe­cial­ly for in­vest­ment pur­pos­es. The prob­lem of course is man­ag­ing the path that we are cur­rent­ly on.

Tak­en to­geth­er, banks are heav­i­ly ex­posed to do­mes­tic sov­er­eign cred­it and in­ter­est-rate risk through both their se­cu­ri­ties books and their loan books. The long-term in­sur­ance sec­tor is even more con­cen­trat­ed: about 89 per cent of long-term in­sur­ers’ debt se­cu­ri­ty hold­ings are gov­ern­ment se­cu­ri­ties. Pen­sion funds, fac­ing a lim­it­ed menu of long-du­ra­tion, high-qual­i­ty non-sov­er­eign as­sets, have al­so piled in­to gov­ern­ment pa­per as their pri­ma­ry in­vest­ment as­set.

I re­peat, in a small cap­i­tal mar­ket with few al­ter­na­tives, the en­tire fi­nan­cial sec­tor has, by de­fault, end­ed up con­cen­trat­ing its in­vest­ment risk on the sov­er­eign bal­ance sheet. The onus is on the Gov­ern­ment to man­age its bor­row­ing lev­els so that this con­cen­tra­tion does not lead to the Bar­ba­dos sit­u­a­tion.

The debt-ma­tu­ri­ty pro­file com­pounds the vul­ner­a­bil­i­ty. In fis­cal 2024, about 18 per cent of to­tal gov­ern­ment bor­row­ing was used sim­ply to re­fi­nance ex­ist­ing debt rather than fi­nance new spend­ing. For fis­cal 2025 cen­tral gov­ern­ment debt ser­vice con­sumed about 24 per cent of rev­enues. The gov­ern­ment is on a fis­cal tread­mill, bor­row­ing to pay off old debt, with a chunky share ma­tur­ing each year. Any tight­en­ing in fi­nanc­ing con­di­tions would im­me­di­ate­ly stress both the sov­er­eign and the do­mes­tic in­sti­tu­tions that hold and roll that debt.

Com­pound­ing

The sov­er­eign-bank nexus is not oc­cur­ring in iso­la­tion. It in­ter­acts with oth­er vul­ner­a­bil­i­ties the Cen­tral Bank ex­plic­it­ly high­lights over the past cou­ple years. The two most rel­e­vant here are ris­ing house­hold in­debt­ed­ness and height­ened liq­uid­i­ty risk.

Mo­tor ve­hi­cle loans, cred­it card bal­ances are a sig­nif­i­cant part of house­hold debt oblig­a­tions and there is ev­i­dence to sug­gest that house­holds are in­creas­ing­ly bor­row­ing to man­age ex­ist­ing oblig­a­tions as op­posed to fi­nanc­ing new pro­duc­tive as­sets.

Liq­uid­i­ty is the third leg of the vul­ner­a­bil­i­ty. In ear­ly 2024, ex­cess re­serves fell to around $3.8 bil­lion, the low­est since the ear­ly pan­dem­ic, as gov­ern­ment do­mes­tic fi­nanc­ing ab­sorbed cash. In Ju­ly 2024, the Cen­tral Bank cut the re­serve re­quire­ment from 14 per cent to 10 per cent, in­ject­ing about $4 bil­lion; av­er­age ex­cess re­serves lat­er sta­bilised around $4.8 bil­lion.

For the av­er­age saver or bor­row­er, these dy­nam­ics may seem ab­stract. They are not. You saw what hap­pened with Bar­ba­dos at the start of this col­umn and you have an un­der­stand­ing of how we got here at the end of 2025.

What needs to hap­pen is that fi­nan­cial in­sti­tu­tions need to man­age the con­cen­tra­tion risk go­ing for­ward. In­ter­lock­ing gov­ern­ment-ap­point­ed di­rec­tor­ships are not con­sis­tent with the in­de­pen­dence need­ed to man­age this risk.

This risk is man­aged by cred­i­ble, sus­tained fis­cal con­sol­i­da­tion that re­vers­es the debt tra­jec­to­ry, re­shap­ing ex­pen­di­ture struc­tural­ly rather than re­ly­ing on one-off cuts, broad­en­ing the tax base and re­duc­ing de­pen­dence on volatile en­er­gy rev­enues, strength­en­ing pru­den­tial over­sight so banks and in­sur­ers don’t sim­ply dou­ble down on sov­er­eign pa­per, and deep­en­ing cap­i­tal mar­kets enough to give our fi­nan­cial in­sti­tu­tions re­al al­ter­na­tives to gov­ern­ment bonds.

You will no­tice over the past six months that I have al­most been on a cru­sade to ad­vo­cate for the strength­en­ing and deep­en­ing of the cap­i­tal mar­kets. I laid out the con­se­quences for not do­ing so at the start of this col­umn.

To be clear none of these sug­ges­tions are quick fix­es. All re­quire po­lit­i­cal will that has been scarce up to this year. An equal­ly con­cern­ing ap­proach is the per­spec­tive that we can spike bor­row­ing in the short term in or­der to turn things around and re­duce the debt tre­jec­to­ry in the long term. The flaw with this ap­proach is to as­sume that the ex­ter­nal en­vi­ron­ment re­mains con­stant such that when we de­cide to ad­dress the is­sue, cir­cum­stances will “al­low” us to do so.

The clas­sic ex­am­ple of this is con­tin­u­ing to “mark time” be­tween 2015 and 2020 and then came the pan­dem­ic, which fur­ther re­strict­ed our fis­cal space. The fu­ture is nev­er guar­an­teed. Wait­ing for the neg­a­tive feed­back loop to re­solve it­self or hop­ing that en­er­gy prices bail us out again is not a strat­e­gy. It is a gam­ble with our col­lec­tive fi­nan­cial se­cu­ri­ty. Bar­ba­dos has al­ready shown us how that sto­ry ends.

Ian Nar­ine is a fi­nan­cial con­sul­tant loop­ing to es­cape the loop. Please send your com­ments to ian@ian­nar­ine.com