Published On: Wed, Oct 14th, 2020

Cft objects to intended 75 million bond issue

PHILIPSBURG – Unless Finance Minister Ardwell Irion makes a U-turn, there will be a 75 million guilders bond issue for St. Maarten on October 21. It is an expensive attempt to get the country out of its financial quagmire, because the interest rate on the bond is 5 percent and St. Maarten will have to pay 1,875,000 guilders interest every six months for 25 years. At the end of its term, on October 21, 2045, the bond will have cost the country 48,750,000 guilders in interest.

Related news: Central Bank announces new bond issue for St. Maarten

The Central Bank announced the bond issue in a press release dated October 13. Financial supervisor Cft received prior notice of the bond issue from the Central Bank four days earlier and a day before the Central Bank’s press release Cft-chairman Raymond Gradus wrote in a letter to Finance Minister Irion that the intended bond issue violates article 16 of the consensus kingdom law financial supervision (Rft).

Related link: CFT letter to Minister of Finance

“As far as the Cft knows, there has been no decision making in the Kingdom Council of Ministers that permits deviation from the current procedures and criteria for this intended loan. The Cft is of the opinion that you are not authorized to attract a loan via the Central Bank. The Cft assumes that you will stop this procedure and that you will act according to the Rft.”

What will happen if Minister Irion ignores the warning from the Cft remains to be seen. The Central Bank has simply announced the bond issue without further ado and it has informed the Cft about it ahead of time.

Cft-chairman Gradus notes in his letter to Irion that the country is only permitted to attract loans for capital investments. Given the country’s dire financial situation it seems fair to assume that the loan Irion has in mind will be used to cover payroll and operational expenses.

Article 16 of the consensus kingdom law financial supervision – a law that was put in place with the approval of St. Maarten’s government – clarifies how the intention to launch the 75 million guilders bond issue violates the rules.

Firstly, such loans must be part of the country’s budget and the Cft assesses whether the intended loan meets the legally established requirements. If the loan goes to the financial market with a public tender via the Central Bank (which applies to the case at hand), this is done “in agreement with an advice about it from that bank.” There has not been such an advice from the Central Bank about this bond issue – at least not publicly.

While the Netherlands has a current subscription to these loans against the actual yield on state loans it is doubtful whether the Netherlands will provide the funds for a bond issue that does not have the approval of the Cft.

This means that St. Maarten will become dependent on other parties that are willing to risk their money against a high interest rate. An article in the Volkskrant of September 22, shows in great detail how the Dutch Finance Ministry got €5.96 billion ($7 billion) from investors within three quarters of an hour against an interest rate of 0.028 percent.

Related article: How the Dutch treasury raises billions practically ‘free’

Against those conditions, the 75 million bond issue minister Irion has in mind would have cost only 21,000 guilders in interest per year instead of the 3.75 million it is going to cost the country now – that’s almost 180 times more than the cost of the Dutch bond issue.

The Cft does not have a lot of meaningful options to stop St. Maarten from issuing the bond issue. Yes, it has the authority to advice the Kingdom Council of Ministers to give an instruction to St. Maarten. But by the time that process has reached its conclusion – if it comes to that – the harm will already have been done.

There is yet another dubious aspect to the intended bond issue. According to the press release of the Central Bank this is a so-called “sinking bond according to an annuity schedule.”

According to walltreetmojo.com sinking bonds are used by parties with a low credit rating and a bad credit profile.” The web site also notes that these bonds have a high default risk and that the parties issuing them usually struggle with “strained financial health.” Unfortunately, all this sounds rather familiar.

The intended bond issue – Minister Irion can still withdraw it until the day of description – is an expensive solution; but for what exactly? According to this year’s second execution report St. Maarten’s expenditures amounted to 283.8 million guilders up to the second quarter – that is 47.3 million per month.

In other words: the 75 million bond loan will cover government’s expenditures for a bit more than 1.5 months. So the government will use all of the money it intends to collect with the bond issue in a little bit more than six weeks before the treasury runs dry again.

Per June 2020 the country had just 53.5 million guilders in liquid assets at its disposal and there still is no agreement with the Netherlands about continued liquidity support. Based on the country’s monthly expenditures level it seems clear that borrowing 75 million guilders against an extremely high interest rate will not solve any problem: it will just commit tax payers for a very long time to the dear consequences of an ill-advised financial decision.