Government to borrow up to $800m

Statement by Finance Minister Bob Richards

The MOF has been reviewing its borrowing arrangements and practices used to finance ongoing budget deficits.

It is important to emphasize that this Minister and this OBA government is unequivocally committed to the elimination of government deficits. Steps toward that objective are still a work in process and will be revealed at the appropriate time.

However, in the meantime it is forecast that the government will likely run operational deficits in the next three to four years.

The purpose of this press conference is to announce a revised strategy as to how the government actually finances the expected deficits in the medium term.

Although the previous administration gave lip service to the inauguration of a medium term financial plan, their actual method of debt financing remained unchanged: i.e. the method was to borrow money either through bank lines or bond issues for the current fiscal year. There has never been multi-year financing, until now.

The next bond issue, expected this summer, is anticipated to cover three years’ government operating deficits.

Therefore the amount raised will be in the range of $400-$800 million.

            The bond issue will consist of at least two separate tranches

            A US$ institutional tranche.

            A BD$ local tranche.

There will likely be three distinct investor groups targeted for subscription:

Local retail BD$ investors.

Bermuda based US$ institutional investors.

Global institutional investors.

Why have we decided to make this strategic change?

We judge that we are in the last phase of the ultra- low US$ interest rate cycle. As the US economy gains strength, US$ interest rates, and therefore bond yields and borrowing costs, are highly likely to rise.

Borrowing three years’ worth of deficits now will save the government tens of millions of dollars of financing costs.

This will give us certainty of financing as well. Instead of borrowing on a year to year basis in a rising market, we will be locking in three years at low rates.

It will demonstrate that we are asserting control of our deficit situation, instead of being constantly reactive.

It will also demonstrate to rating agencies that we are tapping the local money markets, as they have repeatedly recommended.

The Ministry is currently reviewing offers from a variety of investment banks to manage this upcoming bond issue and will announce the successful manager/managers in due course.

We are confident that there is significant appetite in the local retail market for government bonds.

We have already apprised the rating agencies of our change in strategy.

Some of you may be shocked by this announcement and the size of the issue, but the logic of this strategy, as stated, is easy for anyone to understand.

Bermudians may well ask, “What about the debt ceiling and the new debt rules only recently put in place. Are you not breaking your own rules?”

The answer is no, we are not.

Public debt is defined by a simple formula: gross debt outstanding minus money in the Sinking Fund.

We intend to borrow three years’ worth of deficits but place two years’ worth in the Sinking Fund. This mean that the Public Debt, as defined, will only rise by the one year’s worth of deficits. We will take money out of the Sinking Fund as needed to finance the deficit.

The money placed in the Sinking Fund from this bond issue will be prudently invested until it is needed.

Bermudians may well also ask, “You were elected to reduce the debt, not increase it. You’re reneging on your word!”

The answer to this question is in two parts:

This strategy will save the treasury between $20-40 million depending on what interest rates do in the next 3 years. One thing we know they’re not going down. Saving that kind of money reduces the debt.

Every thinking person must accept that the debt will not be reduced over-night. This is money we would have had to borrow anyway, it is only a question of timing. We choose now because we have the advantage.

Lastly we will need to amend the Government Loans Act to allow money to be deposited and extracted from the Sinking Fund, as it was not designed for multiple year budgeting. These amendments will be laid before the House shortly.

Thank You.