How Safe are ‘Safe’ Government Bonds?

A recent item in the Barbados Advocate has left Caribbean investors still reeling from the effects of the CLICO and Stanford fiascos more than ever jittery. With the ECCU’s worsening debt-to-GDP ratios, many are wondering how safe are safe government bonds?
Headed “Lessons from St Kitts,” and written by Geoffrey Cave, the Advocate article states in part: “St. Kitts and Nevis is currently experiencing a bond default that rivals that of Greece in its severity for bondholders. Investors including individuals, governments and pension schemes are now in the process of watching between 75% and 85% of their investments disappear into thin air as the St Kitts and Nevis government is unable to pay its debts.”
Additionally: “Almost as noteworthy as the default itself is the near complete lack of news coverage it has received in places like Barbados.” The writer considered it important that the development in St Kitts was given media attention, “because we in Barbados ignore it at our own peril.”
He further warned: “Recent events should remind us that countries that borrow excessively can and will go bankrupt, affecting the living standard of everyday citizens for decades afterward.” While the causes may differ for various reasons, Cave went on, the common cause centers on some level of sustained fiscal irresponsibility by the government of the country.
“Excessive borrowing by countries for non-productive projects,” he wrote, “inevitably comes to roost,” for in the end “there is no such thing as a free lunch.”
“Borrowing and increasing a country’s total debt levels to pay current wages and salaries,” Cave noted, “especially when the debt levels are already at alarming levels, is not a recipe for lasting economic prosperity . . . We should demand to see what the money being borrowed in our names will generate for our children in turn. We stand to lose an awful lot by ignoring the lessons of St Kitts.”
Government bonds are issued by a national government, generally promising to pay a certain amount (the face value) on a certain date, as well as periodic interest payments. The first ever government bond was issued by the English government in 1693 to raise money to fund a war against France. Later, governments in Europe started issuing perpetual bonds (bonds with no maturity date) to fund wars and other government spending. The use of perpetual bonds ceased in the 20th century. Currently governments issue bonds of limited duration. Last year Greece defaulted on its domestic currency debt (as did Russia in 1998). Its bonds were considered very risky, in part because Greece did not have its own currency.
The St Kitts default, meanwhile, has been blamed on excessive and reckless borrowing by its government. According to a paper prepared by Arnold MyIntyre, program coordinator at the Caribbean Regional Technical Assistance Center:
“ECCU countries are among the world’s most highly indebted. All six independent ECCU countries rank within the 15 most indebted emerging markets and developing countries, of which three (Antigua and Barbuda, Grenada, and St Kitts-Nevis) have public debt-to-GDP ratios of over 100 percent. All six countries exceed the ECCU’s target debt-to-GDP ratio of 60 percent . . . About ten percent of the regional debt is in arrears.”

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