FRIDAY, JAN. 6: S&P’s downgrade is not a surprise. It was inevitable. The knowledge that this downgrade was coming, coupled with the recent push-out of the reality and the facts of Bermuda’s national financial situation into the daylight of the public domain was probably a large part of the impetus for the Pre-Budget Report and Ministerial Statement of 12th December 2011. Both papers demonstrated a degree of acceptance of Bermuda’s difficult economic circumstances. Both papers promised action.

Going forward, one thing deeply disturbs me.

In both the Pre-Budget Report and Ministerial Statement, it is clear that senior Government financial people are ‘playing with numbers’. They are using non-matching and non-connecting financial numbers. They are coupling this with unnecessary accounting legerdemain.

The clearest example begins on page 17 of the Pre-Budget Report [PBR]. The fifth paragraph describes Government expenditure in this FY (2011-12): “The Government’s revised current account expenditure, excluding debt service, is expected to be $950 Million...”

“Debt Service” cannot be excluded from Bermuda’s current expenditure. Debt Service is, in fact, the first and priority payment if Government is to continue meeting its day-to-day financial obligations by paying its day-to-day bills. This exclusion is a highly undesirable accounting obfuscation.

It conceals the reality that the total “current account expenditure” will be much higher than $950million.

Debt Service Cost is set out in the first paragraph on page 17 of the PBR. This paragraph tells us that the Interest payments for the first six months of 2011/12 (01 Apr 11 to 30 Sep 11) were $35 million.

With Debt still growing, full year Interest payments (for 2011/12) will be not less than $70m. In addition, the 2011/12 Sinking Fund [SF] obligation will exceed the $25.8m already acknowledged.

Total Debt Service Cost for 2011/12? Start with $70m. Add the full SF contribution for 2011/12 which will be not less than $31m.

Not chump change

The total Debt Service Cost for FY 2011/12 will therefore be at least $101m. This is over ten per cent of the quoted $950 million. This $101m is not chump change. It cannot be arbitrarily “excluded”!

The Minister tells us that “current account expenditure” will be about $950m. The Minister should have been more open — transparent? 

The Minister should have told us that “current account expenditure” will be about $1,050m. That’s the reality.

The Minister anticipates that Revenue for 2011/12 “will be between $920 and $930m” [Min Statement p.9]. From this, it’s clear that this year’s overspend will be around $120m ($130m) [$930m/$920m Revenue less $1,050m true Spend = $120m/$130m deficit].

This means another big borrow to go along with the $242.8m that the Minister has now admitted had to be borrowed just to get through the previous financial year, 2010/11 [Min Stmnt p8].

In just two FY’s [2010/11 and 2011/12] the Minister will have borrowed $242.8m + $120m/$130m = $360m/$370m overall.

From the PBR and the Ministerial Statement, it is obvious that the Minister is now borrowing money in order to fund “current account expenditure”. In 2010/11, out of the $1,260m that the Minister reports as expenditure [Min Stmnt, p9 and PBR, p15]; it is now clear that $242.8m was borrowed money.

Big borrowing

This means that in 2010/11, out of every dollar that Government spent, Government had to borrow 20c.

Or, out of every $5 that Government spent, Government had borrowed $1. In 2011/12, the Minister is avoiding telling us that out of every $5 that Government will spend, Government will have borrowed $0.50.

The Minister for Finance must make yet another big borrow by June 2012. That new borrow will help force the next S&P rating even lower. In addition, the Minister will have to raise the Debt Ceiling from its current high level of $1,250m. The Minister will be raising the Debt Ceiling while Bermuda’s GDP is dropping. The Classic Debt Trap!

This kind and level of borrowing and spending is completely and absolutely unsustainable. Financially, Bermuda is going downhill almost as if it is on skis.

From the Ministerial Statement and the Pre-Budget Report, and from reviewing the April 2003 to December 2011 rapid buildup of Debt and consequent loss of monetary flexibility, it is absolutely clear and painfully obvious that Bermuda is now suffering the consequences of eight consecutive years of bad financial management.

From the PBR and Ministerial Statement, it looks as if the team that made that string of bad decisions is now trying to muddle its way out by fudging numbers.

This team is playing a no-win game – with public funds. Not a good way to end and start a year.