By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
The Government will only incur “modest” financial costs over the 10-year Bank of the Bahamas bail-out, an international rating agency praising its “swift action” to prevent any wider impact on the commercial banking system.
Moody’s, in an assessment that effectively backed the Government’s decision to rescue the ailing BISX-listed institution, and its method for doing so, agreed with the Christie administration’s position that it had not added to the growing $5.8 billion national debt.
In what amounted to a quiet, under-stated endorsement of the Government’s approach, Moody’s said the ‘rescue’ would have no “near term” impact on the Bahamas’ sovereign credit rating.
Instead, the Wall Street credit rating agency appeared more concerned about the ‘bigger picture’, saying the Bank of the Bahamas situation highlighted the commercial banking industry’s elevated non-performing loan levels.
It warned that it would take “several years” to reduce these ‘bad’ loans to acceptable levels, and that this would act as a drag on Bahamian economic growth and recovery by limiting credit availability.
As a result, Moody’s warned that unspecified “measures” to stop non-performing loan growth were needed, praising the Central Bank’s recently-unveiled plans to establish a Bahamian credit bureau.
Analysing the Bank of the Bahamas rescue plan, Moody’s said: “As structured, the deal does not directly affect the sovereign’s creditworthiness, as these notes will not be reflected in its balance sheet, and any additional costs that could be incurred by the Government in the future are likely to be modest.”
The ‘bail out’ is based on a ‘bad loans for unsecured government bonds’ swap, whereby a portfolio of troubled Bank of the Bahamas loans has been transferred to Bahamas Resolve, a so-called ‘bad’ bank, in exchange for promissory notes.
Bahamas Resolve will pay interest on these bonds to Bank of the Bahamas, presumably using proceeds from loan recovery, helping to fill the ‘hole’ left on its balance sheet.
However, given that the deal allowed Bank of the Bahamas to ‘write back’ $55 million into its retained earnings, returning them to positive territory, critics are calling on the Government to confirm whether the collective ‘bad’ loans transferred to Bahamas Resolve was $100 million, or really $45 million.
Moody’s did not answer these questions in its analysis, but said the ‘bail out’ did not impact the Government’s financial position, as the security for the bonds was not a ‘contingent liability’.
The Christie administration has provided a ‘letter of support’, rather than guarantee, to underwrite the bonds, thus preventing the rescue plan from becoming a liability on its balance sheet.
“The rescue plan leaves the Government’s balance sheet unaffected, as Bahamas Resolve’s notes carry a letter of comfort, but not an explicit guarantee, from the Government,” Moody’s said.
“This means that the notes do not represent a contingent liability for the sovereign, although the Government might choose to support the entity at its discretion. The Bank of the Bahamas deal does not impact the sovereign’s creditworthiness in the near term, at a time when authorities are pursuing fiscal consolidation with the aim of stabilising the Government’s debt-to-GDP ratio.”
However, Moody’s made clear that the Government’s (taxpayer) costs in relation to the Bank of the Bahamas ‘bail out’ will ultimately be determined by how successful Bahamas Resolve is in collecting on the ‘bad loans’ over the next decade.
“Uncertainties over loan recoveries mean that there is a possibility that, over the 10 years that Bahamas Resolve is expected to exist, there could be financial costs, albeit relatively modest ones, for the Government,” Moody’s warned.
It also suggested that some Bahamas Resolve’s start-up costs could be covered by the interest earned on the Government’s deposits at Bank of the Bahamas, although its operational costs would have to be covered by loan recoveries.
Moody’s also noted that despite the Government injecting $65 million worth of deposits into Bank of the Bahamas during its last financial year, the total was down by $44 million at June 30 - suggesting $109 million in private sector depositors had fled the bank.
The rating agency, though, appeared more concerned about the Bahamian commercial banking industry’s collective non-performing loan pile, and the resulting drag on the economy.
“The problems faced by Bank of the Bahamas highlight the negative effect the global financial crisis has had on the Bahamian banking system,” Moody’s said.
“The banking system’s non-performing loans were 16.1 per cent of total loans at end-2013, and 17.2 per cent as of August 2014, compared to 6.1 per cent in 2008.”
And it warned: “The health of the banking system continues to pose challenges for the Bahamas, as a relatively high level of non-performing loans is an important factor limiting credit growth and stronger economic recovery.
“Since clearing the existing stock of non-performing loans will take several years, measures to avoid an increase in their level will be required to ensure that the financial health of the banking system does not further deteriorate.”
Backing the proposed Credit Bureau as offering “better risk assessment” of borrowers, Moody’s said the Government had little choice but to rescue Bank of the Bahamas.
“In the Bank of the Bahamas incident, the Government’s swift actions prevented contagion. Furthermore, Bank of the Bahamas is a relatively small institution with assets accounting for just 7.6 per cent of the banking system, and equivalent to only 8.9 per cent of GDP,” Moody’s said.
“Thus, despite the relatively high level of non-performing loans in the system, given the banks’ adequate capitalisation, low level of interconnectedness, and ample liquidity, we believe the risk of a banking crisis remains contained and is modest.”
Comments
Well_mudda_take_sic 9 years, 4 months ago
Nothing but smoke and mirrors in Moody's statements made in this article. They, like the S&P, IMF, World Bank and IDB are all laughing with glee as the financial position of the Bahamas becomes increasingly destabilized by our elected governments (whether PLP or FNM), now almost to the critical point where these uncaring international agencies controlled by and concerned only with the interests of the U.S. government will takeover responsibility for the future standard of life and quality of living of the Bahamian people. What happened in Jamaica when this happened will be a joke compared to what will happen to us! Many once reasonably well-off Bahamians will be saying: "Dear brother can you spare me a little soap and some tooth paste? It has been weeks since I've had a decent cleaning of my filthy body and brushing of my decaying teeth! Lord have mercy on me."
Reality_Check 9 years, 4 months ago
There's a lot of truth to what you say here in as much as the organizations you mention are well known instruments of U.S. foreign policy and the U.S. government has a well established history of preferring to deal with corrupt puppet governments of its own choosing that it can more easily influence and control. By geographical proximity alone, the Bahamas will always be of a strategic national security interest to the U.S. What the U.S. government and its controlled agencies like IMF, World Bank, IDB, Moody's, S&P, etc. did not plan on in their efforts to destabilize the Bahamas, was that the Chinese would show up and be so fondly loved by the Bahamian government. Of course, neither the U.S. government nor the Chinese government could give a rat's arse about the quality of life and general well being of the Bahamian people in the long term. They are entirely motivated by there own interests and not the least bit by ours!
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