Tiny Belize has caught the attention of investors lately, but for all the wrong reasons. The government of Prime Minister Dean Barrow has been strategizing what to do with the country's onerous $544 million Superbond. In Barrow's eyes, the Superbond's terms (such as the date of its maturity as well as its coupon payments, which are scheduled to increase to 8.5% this August) are too tough on the government, which is struggling to revitalize a sluggish economy, invest in crumbling infrastructure, and figure out a way to reduce skyrocketing rates of crime and violence. Behind closed doors in the capital city of Belmopan and during secretive meetings with the IMF and the IDB, the government is discussing its options, and it's scaring the heck out of Wall Street. As Adam Williams reports in Bloomberg today
, various traders and strategists are making serious bets on Belize's decision, and yields on its bonds are some of the highest in the world:
“What I think is likely is that they will propose a return to lower coupons and perhaps some maturity extension,” said Marcela Meirelles, a Latin America strategist in Los Angeles for TCW, which oversees $128 billion of assets and bought Belize bonds after the sell-off. “They can engineer a situation in which the debt service is once again manageable.”... In 2007, Belize was spending a quarter of its revenue on interest payments. Public debt outlays equaled 13.6 percent of revenue from April 2011 to March 2012, according to the central bank. The jump in the superbond’s coupon ahead of the elections probably made continued payments a “deal breaker” for the government, said Franco Uccelli, senior economist for Central America and the Caribbean at JPMorgan in Miami.... “They got a big relief in terms of their debt service burden” in the earlier debt restructuring, Meirelles said. “They don’t need a big haircut.”
|Belize is in need of an economic development push|
These investors are making a big bet on Belize's debt-- if they hold on to it, and Barrow doesn't call for a haircut (reduces the principal owed to investors) -- then the bonds will rally and they'll make money.
I'm not so sure about this, though. The logic of these investors smacks of economists thinking like economists ("if Belize can afford the debt payments, then it will not restructure"), and not taking into consideration the government's incentives. Barrow isn't happy that his government has to pay the terms of this bond (which were already renegotiated once a few years ago under the opposition PUP government). His government is struggling to boost the economy. Rampant gangs and drug traffickers are terrorizing the population, and the government doesn't have the resources to stop them. I went to Belize City for a research trip in April, and the city is crumbling -- literally. Damaged buildings trashed by the last hurricane are stagnating in disrepair. My taxi driver warned me not to leave my hotel at night (which was in the "nice" area of the city). There is one, as a former colleague warned me, "minimally palatable hotel" in the entire city.
I don't mean to hate on Belize, but some serious work needs to be done to improve that country's infrastructure, economy, and public security. And if you're Prime Minister Dean Barrow, what do you do? Pay off debts to international investors who threaten you that if you don't meet the terms of their bond arrangements, your government will be barred from receiving future investment? Belize already faces prohibitively high interest rates to borrow. Does Barrow have much to lose if he defaults? Ecuador defaulted a few years back, and yet it seems to still have access to help from the multilateral financial institutions.
I'm not in the business of giving investment advice, but I think the abundance of optimism revealed in this Bloomberg article is based more on wishful thinking, rather than a seriously thought out assessment of what is going on in the minds of Belizean government officials.