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…

“We need foreign capital.”

February 27th, 2013 by De Onion

Not all foreign capital is created equal. We need to be smart about how we get money into Bermuda. In order of the value of foreign capital:

1. Earned from global business and paid as salaries to Bermudians. The paycheques of Bermudian employees by definition come in from overseas and get put straight into Bermudian pockets – then those Bermudians go out and spend it, sending money zinging around Bermuda.

2. Earned from global business and paid as rent/expenses to Bermudians. All the service companies that do work for global business, all the rent payments to Bermudian landlords. Again, straight into the pockets of Bermudians and then around the economy – especially to the service companies.

3. Earned from global business and paid as salaries to non-Bermudians. A large fraction of these paycheques are immediately paid to Bermudians as rents, another fraction to Bermudian businesses in services, and purchases, and a smaller fraction goes with them when they leave.

The worst possible thing we could do is sell local land or companies to foreign businesses. For the most part these transactions tend to just put temporary money into the pockets of the Bermudian former owners at high valuations and then imply an endless stream of dividend payments out of Bermuda’s economy in perpetuity.

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.

365 day a year tourist

November 3rd, 2012 by De Onion

Bermuda’s economy has undergone a shift that few seem to recognise: The rise of global business has spawned the 365 day a year tourist who lives in a Bermudian owned hotel. That “hotel” is actually a rental house or apartment.

We would do well as a nation to rubber stamp foreign exchange generating work permits in exempt companies and seek to build large “hotels” in Hamilton to house these people. With the right policies it can be done, and will cement Bermuda’s place as a global business centre.

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.“

How Close to Going Greek?

November 2nd, 2012 by De Onion

The recession will continue without radical change.

Assuming Bermuda keeps its $5.5 billion in real GDP this year (unlikely) the government deficit could easy end up at over $300 million (~1.2 billion spending, ~870 million revenue). That $300 million gap will have to be closed in the very short term through spending cuts – and depending on the multiplier one uses it will inevitably pull another ~5% off the GDP. That GDP loss will be concentrated virtually entirely in the civil service and government contractors.

If that happens swiftly because Bermuda loses access to financing then the fallout will be catastrophic – especially to the PLP’s electoral chances if they form the government after this election.

Budgeting & The Options

October 9th, 2012 by De Onion

There are 4 options for Bermuda (or a combination)
1. Austerity – cut spending to live within our means in an orderly fashion. This can either be done now with severe implications to Bermuda, or it can be done later with even more severe implications. The longer we wait, the worse it gets. The PLP has already begun this process, but too little, and far too late – meanwhile it’s attacking the OBA for proposing exactly what the PLP is already doing.
2. Growth – This would involve radical reversals of many policies, especially term limits and immigration. Even then it probably wouldn’t be enough to balance budgets and begin to pay our way out of the hole.
3. Bankruptcy – Disorderly and immediate cuts to the government as it loses access to capital markets.
4. Tax increases – These were tried in 2011 with the Payroll tax and then reversed. The current size of a tax increase needed to balance the budget without cuts is equivalent to approximately $7,500 per working person in Bermuda.
To have tried and reversed #4 and is attacking the OBA for mentioning #1 and #2 we can only assume that the PLP is favouring #3: Bankruptcy. No matter which one is chosen, Bermuda will face serious negative consequences and constraints for decades.

Other clearly false or misleading talking points making the rounds:

Claim: The deficit exists because of recession induced revenue shortfalls. This isn’t true because: Revenues increased by hundreds of millions of dollars between 2004 and today, and large deficits started years before the recession. There has been a consistent upward trend in revenue right up until 2010. If the deficit was caused by revenue shortfalls then we would expect it to start in 2010, not 2006.
In fact, if revenues had been at expectations instead of much higher then deficits would have started years earlier as can be seen comparing the budgeted amounts from the actual in the following reports:
The trend of overspending was established in 2004, 2005, 2006, 2007, 2008.

Claim: The Bermuda recession was caused by the Great Recession. This isn’t true because: Jobs didn’t disappear, they moved. Jobs only disappeared in the local economy because we lost the people who bring money into the island – the 365 day a year tourists. The drop in expatriate population and in workforce size makes this absolutely clear. Aside from tourism, Bermuda’s main lines of business were unaffected by the recession. Even tourism has since recovered in other countries, but not in Bermuda.

Claim: Bermuda continues to be impacted by the Global Financial Crisis. This isn’t true because: Bermuda’s main industries were only very temporarily affected and have since recovered while Bermuda continues in a downward spiral. We also had none of the issues that are currently causing other countries to fall into recession such as a real estate bubble (our boom was not a bubble because houses were still fairly valued vs. rental yields), we had no banking crisis, and we did not lose a major pillar of our economy like other countries in crisis.

Claim: Investment vs. Austerity. This isn’t a debate. Austerity is inevitable and every year of deficit spending it will be more severe (because they are adding on to the interest payments that need to be made). it’s possible that we could avoid severe cuts in government spending, but only by repealing policies that have caused the recession. Every year we spend before we face the inevitable we are burdening ourselves with ~$15 million more in interest costs, that = ~150 jobs lost.

Claim: Paula Cox has been right on the economy. This is not true. Virtually every time she has opened her mouth on the state of world affairs she has been dead wrong – from her claims of a “post recessionary environment” to her claims that “fears over the euro have largely subsided” literally the day the Financial Times ran a headline about bond spreads (a measure of fear) jumped dramatically. Meanwhile, those who have been right on the budget and economy (Bob Richards, Grant Gibbons, Larry Burchall, Sir John Swan, etc. as well as blogs like,, and have been attacked as being part of the “combined opposition” when we can now see that in fact they were prescient and correct.

Claim: Debt is neither good or bad, it’s how you use it that matters. A good use of debt is to re-invest at a higher rate of return than the cost of interest/repayments. The government has only done this with a small handful of projects that could have been financed purely from surpluses (had they banked the surprise excess revenue in the early/mid 2000s). The reality is that we got very little from our $1.45 billion and counting of debt and will face severe consequences of smaller sustainable government – 13% smaller (fewer jobs, fewer services) in the coming year and if the current trend continues we’ll be at over 20% of government’s income going to debt service within the next 5 years. Simple question: Has the $1.45 billion in debt been worth spending $105 million per year for 30 years to pay it off? For perspective, that’s roughly enough money to keep 2000 families out of poverty. I think the answer is self-evidently “no”. The current size of the debt alone sets the Bermuda government’s spending power back by about 10 years and decreases its long-term employing potential by about 1000 people.

Claim: The government was prudent in its financial management. This isn’t true because:
a. Budgets were routinely ignored. For the past several years the government has spent tens of millions of dollars a year more than budgeted.
b. There has been a pattern of financial mismanagement highlighted by the Auditor General for many years. As early as 2005 there were known to be huge financial issues in government with $800 million unaccounted for. Fast forward to today and the government is receiving qualified audits, and the Auditor General’s report is longer than the budget itself.

Claim: Bermuda still has a top financial rating. This is irrelevant because a) Bermuda will still face crippling debt service costs for the rest of our working lives, and b) rating agencies have been far behind the market in making downgrade calls. Spain, currently in a very public crisis over its debts and deficit only lost its AAA rating in 2010 and yet would probably have already lost access to credit markets and defaulted if the European Union had not committed to supporting it – so that’s 2 years from top rated to junk. For perspective – this year Spain and Bermuda will both spend about 13% of government revenue on debt service. When the ratings downgrades come they will come quickly and severely and ratings agencies have hinted that they expect to see a radical change of course after the election.

Claim: Debt to GDP is quite low. This is irrelevant because what matters is debt service cost. It doesn’t matter how much your house is worth if you can’t pay your mortgage – the same is true of Bermuda. It doesn’t matter how big our GDP is if we can’t pay our debt without hurting ourselves.

Claim: The UBP left infrastructure in bad shape so the PLP needed to increase spending to maintain it. This is not true because: Minister Michael Scott recently said that many government buildings are nearing the end of their lives. Bermuda buildings are stone and don’t have fixed lives unless they are not properly maintained. The jump in infrastructure spending would have happened in 1999-2004 if the PLP were actually making up for the prior government’s failure – the fact that the jumps in spending occurred years after the UBP left office suggest that it’s the other way around. The recent article about the Gibbs Hill Lighthouse is a very public reminder of this pattern.

Claim: The spending is stimulus. This isn’t true because the pattern of increased spending began years before the recession. If one graphs the budgets the spending line is a consistent straight line beginning many many years earlier.  It’s just that spending was increasing more quickly than revenue – the hallmark of classic financial mismanagement dating back almost a decade.

Claim: Keynes said we should deficit spend in a recession. This isn’t applicable because Bermuda does not meet the basic requirements for Keynesian stimulus. Keynes’ basic insight was that sometimes aggregate demand (total spending capacity of an economy) does not equal aggregate supply (total productive capacity of the economy) and that in times of a boom the government could cool the economy and prevent inflation by taking in money and saving it – in Bermuda’s case this would have taken the form of a sovereign wealth fund built up during the 2000s. Then in times when aggregate demand falls below potential the government can temporarily make up the gap by spending.
a. Bermuda is facing a permanent drop in productive potential.
Bermuda’s drop is permanent because it is driven by a permanent drop in population. This was caused by term limits and immigration as well as other anti-business policies. The government has been warned for years but ignored and attacked those who warned about the consequences in any public way. The constant stream of farcical and impractical policies like “Goodwill Plus” trotted out didn’t help things either.
b. Unemployment is largely structural.
There are jobs even in today’s Bermuda – with 8,000+ expats still on the island. The reason there’s unemployment is that the Bermudians’ skills do not match those jobs. That’s because the island has not systematically invested in its people beyond the age of 18. It continues to fail, with every investment being little more than a publicity stunt (like the recent drywall course where 11 of the 12 attendees were already employed).
c. Government cannot borrow at an interest rate lower than the rate of potential growth of the economy. Deficit spending only works when the deficit is financed at a lower rate of interest than the rate of growth that it causes. In effect when the government can borrow at 0% or 2% and create growth at 3% as the United States, for example, is able to do. Bermuda pays interest rates in the 5% range – and so is almost certainly destroying many tens/hundreds of millions of dollars of national wealth in the long-run.

No amount of “stimulus” spending will change these three.

Therefore the only stimulus that will work is removing the barriers that caused Bermuda’s population to decline – that’s Immigration and Term Limits.

To prevent a repeat, the government must re-invest tax revenues in Bermuda’s people on a large scale systematic way to address structural unemployment – this will need to include both character education and skills training. A side effect of addressing structural unemployment will be decreasing racial inequality.

“Stimulus” spending is a temporary political option that will help the ruling party in this election but hurt Bermuda for years to come. The only argument for continuing high spending that holds up is “but if we didn’t spend that much then we’d have to lay off 1,200 people”. Moving the layoffs until after an election is good politics, but for every year we wait to make those layoffs is another 150 jobs that will be permanently cut in the long-run due to the interest costs of waiting.

The big picture is that Bermuda is on its way to bankruptcy as a result of actions by politicians and the ultimate fallout will leave thousands unemployed.

Lesson for governments

May 15th, 2012 by De Onion

Walton Brown without fail misses the salient issues and it’s an embarrassment to have him publish in our daily newspaper. This week he’s missing the point on government austerity.

The lesson for governments is simple: Unless you have your own currency (USA, Japan, UK) then you can’t spend more than you make for very long. Austerity is inevitable for these European countries just like it’s inevitable for Bermuda. For us in Bermuda, here’s why:

The PLP has increased spending far more quickly than income has increased. THAT is why Bermuda has to cut spending, and yes, that will hurt the governing party’s political chances and rightly so if it’s the PLP. They put us into this mess.

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.