Bermuda’s bonds trading at ~3% yield

April 6th, 2013 by De Onion

That’s really impressive. They’re thinly traded so the pricing is probably not too meaningful of actual market value, but still…

Defaulting Cities

December 3rd, 2012 by De Onion

First, here’s a link about bankrupt municipalities in the USA. Link

Recently Bob Stewart has also started sounding the drum on the Bermuda government’s impending bankruptcy.


People believe that governments cannot go bankrupt. Well just look at big countries like Argentina and Greece, or small municipalities like Pritchard.

The bond holders, owners of government debt, hate bankruptcy because it requires them to take a hit on what they thought were ultra-safe investments. After all, nothing is safer than lending to governments — or so they mistakenly thought.

What brought these financially underwater cities to their knees were crushing medical and retirement obligations to public workers and to seniors. This brings me to financial issues facing Bermuda.

Much has been said during election promises that seniors in Bermuda need not worry about such things. Indeed, the Minister of Health, Zane De Silva, stated that seniors have no need to be concerned about health costs because government will stand behind its many promises. Good luck — I feel reassured.

The real problem is — as The Royal Gazette pointed out in an editorial on November 21 headlined ‘Petrifying Pensioners’ — that such promises have not been costed, and medical costs are rising at an unsustainable level. But who needs to worry about costs when the full faith and credit of Bermuda stands behind such promises?

I think he is far too optimistic. Based on my models Bermuda is already beyond the point of being able to make its debt payments. If anything, this is the last year it has a hope of turning it around. The government’s numbers are wildly optimistic or outright stilly. The biggest howler is that the government estimates it will only spend half as much on debt this year as it did last year ($35 million vs. $70 million) despite having run up hundreds of millions more debt. My best guess model is that the Bermuda government will have a deficit on the order of $350-$400 million making a few assumptions.

– The government will under-collect revenue due to lower than expected payrolls and customs duties.
– The government won’t sell the buildings it had intended to sell to raise cash (they haven’t even started trying and if they do they won’t be able to sell).
– The government aimed for $130 million in spending cuts between last year’s record budget and this year’s. Those won’t materialise because they were dependent on false-savings by not paying pensions which does not appear to have been implemented.

It’s possible to turn it around and prevent a default – but it will take real spending cuts and a total reversal of Bermuda’s economic decline.

Well, that settles it.

November 2nd, 2012 by De Onion

It seems that Junior Finance Minister David Burt has said:

Looking forward, Senator David Burt has, remarkably, stated that there will be no reduction in Government spending for the next three years.

We can only conclude that the PLP intends to bankrupt Bermuda. 3 more years without a spending cut would mean roughly a billion dollars of new debt by the end of 2015, which would in turn imply the Bermuda government having less revenue after debt service than it did in 2005 – and between 2005 and 2014 prices will have risen roughly 30%. After inflation the real value of the government’s after-debt cashflow could be under $600 million. That’s about what the government spends on staff at present, so if it wants to borrow more and not cut jobs then it’ll have to cancel the electricity, stop ALL social programmes, and not even send Ministers on fancy holidays.

While your assumptions may lead to slightly different numbers – the outcomes are the all the same. Deep cuts are inevitable – and the longer government waits the deeper they will be. As soon as the lenders stop lending the cuts will come.

As Alan Card said “He was underwater and he had his arms wrapped round the fish and the fish was pushing him under… (and) I knew there was no good going to come out of it.“

Banking Stress

February 1st, 2012 by De Onion

In 2004 HSBC Bermuda CEO Phil Butterfield stood in front of a group of employees and proudly and sweepingly announced “we have never lost money on mortgages in Bermuda” as he justified the reduction of mortgage lending standards.

One of the huge highlights of the financial crisis is the current inevitable insolvency of European banks. To put it simply, the banks were allowed to pretend that debt issued by countries (Greece, Portugal, Italy, Spain, etc.) was risk-free and had no chance of loss. So the banks bought that debt and financed government deficits – we now know that debt was not riskless and if European banks lose value in their loans to national governments then they will fail. Normally governments step in to backstop failing banks, but of course governments are the ones with the original problem… etc. Large scale bank failures are fatal to an economy. Utterly fatal.

Hidden away in the BMA’s January banking report is this scary little chart. The numbers themselves are not especially scary given Bermuda’s banks relatively low leverage, but the trend certainly is worrying.

What will it take to induce bank failures in Bermuda? We know that our government debt is very risky and with continued PLP management a default appears to be almost inevitable and with that default any ability for the government to act as the lender of last resort will be gone, the economic equivalent of operating without a net in an increasingly risky economic performance.

Central Bank?

January 10th, 2012 by De Onion

I just don’t get it.

The Premier did elaborate on the rationale for seeking a Central Bank for Bermuda during the briefing.

Currently, she said, the lender of last resort is the Government of Bermuda.

“That’s why when we had a situation with one of our local financing institutions we had the government give that $200 million guarantee,” she said.

“I think that every country is looking at where they can be more protectionist of their taxpayer and also not being held accountable for the faults or the excesses of others.

“For Bermuda it’s a coming of age to at least have those discussions. And also look at what are our options. It could be in Europe, it could be in the US but it is a reserve, separate, over and above of what we have.”

I really want to hear more about this. I mean, Bermuda doesn’t really have its own currency so what other lender of last resort would there be? Bermuda had the opportunity to create a sovereign wealth fund 2003-present but instead the government threw financial management to the wind and we’re upside down to the tune of $1.2+ billion.

To top it off, the taxpayer is being held accountable for the faults and excesses of the PLP.

The real debt math

August 12th, 2011 by De Onion

So after watching the OBA’s presentation on the economy last night I’ve got a few thoughts:

Bob needs to take credit where credit is due – even this lowly blogger posted in 2007 about the upcoming drop in tax revenue and potential for a major economic slowdown. Bob Richards and Grant Gibbons were both sounding the warning horn many years before our current economic crisis and being attacked for it by members of the PLP.

As usual, the Premier has failed to address the salient issues and as usual, Bob Richards has provided a technically correct response that fails to put the salient issues into language that laypeople can relate to. He’s getting better and his presentation last night included a number of realistic proposals that would immediately set Bermuda on the right track… but let’s put the budget deficit and debt in a context of our daily lives so we can see how it hurts us each and every day.

There are about 37,000 working people who generate new wealth for the island and provide goods/services. While retirees, schoolchildren, housewives, and other non-working residents are taxpayers too they aren’t generating the wealth that fuels our domestic economy and allows for the consumption of goods and services so we’ll focus on workers because ultimately we (working people) will be paying for this debt.

Bermuda has about 1.2 billion dollars of debt and climbing.

1.2 billion dollars of debt divided by 37,000 workers = ~$32,400 dollars of debt per worker.Now, the real question – how much is the Paula Cox national debt costing each worker every year? This is important because all-else being equal this is how much more money could be in each worker’s pocket through tax cuts such as the cut proposed by the UBP to Payroll tax for people of modest incomes. This annual debt service money is effectively set on fire as far as Bermuda’s economy is concerned; it simply is paid on an ongoing basis to our foreign or foreign-owned creditors. It’s the taxpayer providing $70 million in interest payments for social services for bankers and bondholders. On top of that we need to pay down the debt, making contributions to the Sinking Fund so that’s an additional $25 million per year. $95 million per year total.

70 million in interest plus 25 million in principal equals 95 million per year out of the taxpayer pocket.

95 million dollars per year of interest/amortization payments divided by 37,000 workers = $2570 per worker per year.

So if you are a salaried or hourly worker look at your pay statement and add $214 per month, or $50 per week to your paycheque. Now take it away again – that’s the Paula Cox/PLP debt tax. If you have a job then you have taken effectively a $2570 a year pay cut thanks to the PLP’s financial management. Be sure to thank them!

Bad Company

October 15th, 2010 by De Onion

It slipped by unnoticed, but Bermuda’s 10 year bond issue went out at 5.6% interest while Mexico issued 100 year bonds at 6.1%.

16 years ago Mexico required a $50 billion dollar bailout after a currency crisis.

This is not good company.

Slow motion trainwreck.

October 8th, 2009 by De Onion

Looks like the Gazette is picking up on what some of us have been predicting… in 2007 I was bullish on the construction industry because I thought that increases in employment would continue and demand for housing would rise to a corresponding degree. The combination of term limits, tighter financing, and global recession has taken us toward the scenario that became more clear in mid 2008.

Overbuilding of commercial buildings is the culprit this time.

In July 2008 I wrote:

The next casualty if real estate goes will be the construction boom. Prices of construction have already risen substantially in dollar terms If the public’s ability to buy falls then builders will not be able to sell quickly, returns to speculative builders will fall, and some may lose money and those most dependent on leverage will fail while most slow down the pace of building. Then the workers building them may then be unemployed – the failure of education and lure of the drug industry have sent a large number of young Bermudians into the combination of drug dealing and construction work. They are going to be pissed off and the effects on Bermuda will be quite painful.

Denis over at has also written about this.

Odds of a large hotel project are very low, although there may be a lot of cleanup work done at Morgan’s Point I think we can be sure that the ultimate beneficiaries will be the usual Friends and Family Plan members. At the same time, the overspending by government during the boom times and deficit spending to fund current expenditure has left the government unable to prudently pursue large capital projects now in a time of cheaper construction.

The Alchemist

July 28th, 2008 by De Onion

For the record – the real slowdown is just beginning.

From the New York Times:

Some suggest that the banks, spooked by enormous losses, have replaced a disastrously indiscriminate willingness to hand out money with an equally arbitrary aversion to lend — even on industries that continue to grow.

Some have suggested that Ewart Brown is a remarkable alchemist for his ability to make a Platinum era in tourism (he picked occupancy numbers from the week of the Newport Bermuda Race) from tourism numbers that most would consider to be more Talc than anything. I expect that if Brown continues to work his magic in tourism and if the US slowdown becomes a truly widespread credit bust then we could soon be in the “Peat” period of tourism. The only thing that will prevent that is if the government decides to use the taxpayers to subsidize large capital investments in tourism for the benefit of private developers… like the Southlands/Morgan’s Point giveaway and the Club Med giveaway. Either way, the people of Bermuda get screwed.

The coming debt crisis.

July 23rd, 2008 by De Onion

An interesting article in the paper today: Car sales concerns.

With car sales dropping 24 percent in May alone, dealerships said it was hard not to notice a lack of customers.

This is not only an indication of economic weakness, but it’s also going to show up somewhere else where it hurts. The government takes a large tax on every car sold. Fewer sales means less tax revenue.

Since our government has presided over massive increase in spending which have not been fatal thanks to almost matching gains in tax revenue, we can expect nothing good from the combination of poor financial control, economic slowdown, and a Finance Minister who would have been fired if she was a company CFO.

Edit: Changed the link from a duplicate of the car sales story to Bob Richards’ response to the audit.