* MCT photo. Sudden impact: Unwise spending will always result in an avalanche of ‘bills’ to be paid.
* MCT photo. Sudden impact: Unwise spending will always result in an avalanche of ‘bills’ to be paid.
Overdraft: In personal or business finance, a sudden need for an overdraft indicates a cash shortage.

It means that a bank account holder knows that there will be 'insufficient funds' in that account at the moment when you or an employee or supplier presents a cheque for payment - or tries to get money from an ATM.

With an overdraft in place, a banker will honour that cheque - or pay out at the ATM - even if there are zero dollars in the account.

Of course, the banker will charge fees and interest, but he won't refuse to honour the cheque and add insult and cause embarrassment, by using that rubber stamp that says 'Insufficient Funds'.

Individuals, corporations, and countries use overdrafts. However, going back as far as the 1970s, the Bermuda Government did not use an overdraft.

To be punctiliously correct, the Bermuda Government did not use a large overdraft facility. What the Bermuda Government always had was a small stand-by overdraft facility.

The banks agreed to honour all Government cheques with the understanding that any Government accidental overdrawing would not exceed a certain amount. I am given to believe that this amount was always less than $1,000,000.

I understand that Government did not use large overdrafts because it preferred and was able to manage its funds so that it always adequately funded its general account.

This ordinary banking arrangement cost money because an overdraft facility incurs a very small daily charge - even if it is not used.

This applies to any individual, household, or business. If there is a need to get an overdraft - bigger than ever before - it means, invariably, that there is a serious cash flow problem.

It is the same for a country. From 1970 through 1998 and right up to March 30, 2008, the Bermuda Government never used anything other than that small overdraft facility.

Then, wham! Bam! Kazzam!...

* March 31, 2008 Government got a $7.5m overdraft facility (O/D) with HSBC expiring 30 December 2009.

* March 31, 2008 a $4m O/D with BNTB expiring 28 February 2009

Six months later...

* October 10, 2008 a "new" $50m O/D with BNTB expiring 31 October 2009

* October 15, 2008 a "new" $50m O/D with HSBC expiring 31 October 2009

Two months later...

n December 21, 2008 an "additional" $50m O/D with HSBC expiring 31 March 2009

Three months after that...

* March 31, 2009 a new $100m O/D with HSBC expiring 31 July 2009.

In just nine months, this current Bermuda Government exploded from having a small O/D not even worth mentioning in any of the Financial Statements prior to 2007; to a December 2008 Overdraft Facility of $161,500,000. The O/D avalanched from $0 to $161,500,000!

Cashflow problem

This was caused by an unprecedented government cash flow problem. What problem? The avalanche problem.

Rising steadily, building into an ever higher pile of debt, a massive bundle of owed dollars starting coming due. Then whoosh! The avalanche.

Individuals, householders, businesses, and nations, all learn the same hard lesson. Bad financial decisions and bad money management always have a bad ending.

Unwise spending will always result in an avalanche of 'bills' to be paid. Always, always, always those bills will arrive the way an avalanche arrives. In a sometimes bankruptingly lethal whoosh!

So, with this government. Five years of bad and unwise financial decisions - the growing trend of government overspending; promising, buying, delivering what was unaffordable at the time; the resultant acceleration in the rate of borrowing - all started coming to a head in 2008.

The debt whoosh kicked the Finance Minister off on a frantic race to stay ahead of the fast approaching avalanche.

Government laws mandate that part of this overdraft should be converted into a long-term loan. For 2010, this will help take public debt beyond $800,000,000.

After that, though, it will be possible to get another overdraft! Remember Enron?!

This sad but true story is co-written by the Auditor General (Heather Jacob-Matthews), Financial Secretary (Donald Scott) and the Accountant General (Joyce Hayward) in their non-fiction story series titled: 'Government of Bermuda - Financial Statements of the Consolidated Fund'.

The series tells a true tale of the outcome of years of weak financial management. Sorry folks, I don't know what will happen after March 31, 2010. That story is still unfolding.

Finance 101: what exactly is an overdraft?


Happens when the money taken from a bank account exceeds the amount of money that is available in that account.

For example, $1,000 in the account, $1,100 taken out of the account - $100 OVERDRAWN.

With an Overdraft Facility in place, the bank will allow the $100 overdraw and will charge daily interest on the $100, until the $100 is back paid in.

No Overdraft Facility? The bank will not allow the additional funds (as happens at ATMs) or may allow the $100 to be taken but charge a penalty.

Overdrafts are temporary but can be converted into long-term loans.