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.

Link

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.