The East Caribbean’s Spurious Union Schemes

The eight small island members of the East Caribbean community, with a common 35-year old 2.7 to the dollar peg, central bank, and securities market entered a fuller phase of free labor, goods and capital movement despite resort to crisis IMF programs and the toll from consecutive collapses of the Trinidad-based CL Financial group, which brought the exchange there down 10 percent in 2010, and the Antigua-centered Stanford alleged pyramid scheme, with the mastermind still facing trial in the US. The former offered high-yield fixed deposits through insurance subsidiaries which have left ECCU account-holders exposed at a cost over 15 percent of GDP. The proposed resolution framework would install new management and entail unit recapitalization and long-term modification of outstanding debt. In the Stanford case, the Bank of Antigua endured a 2009 run as fraud accusations were publicized, and the regional monetary authority assumed control to prevent similar immediate panic in Antigua and Barbuda. The sagas illustrated continuing gaps in non-bank and offshore consolidated supervision which have respectively scuttled regulation and subjected jurisdictions to the OECD’s “grey list,” on anti-crime and tax evasion doubts, according to Fund experts. They added to financial sector and fiscal pressures to be tackled in a joint growth and stabilization program agreed with official creditors last year, but tourism recovery has yet to firm and budget deficits and public debt for the area are in order at 4.5 percent and 100 percent of GDP, with Dominica and Grenada forced to restructure past commercial obligations. The current account shortfall is put at 25 percent of output, financed by concessional borrowing, FDI and the drawdown of bank foreign assets, with Canadian networks active alongside domestic competitors. As in the EU, the debt/GDP ratio is to fall to 60 percent by end-decade, with 2-4 percent primary surpluses a core target. Civil service wage reductions and pension reforms are typical elements, although individual governments face a range of choices and adjustments most extreme in the case of St. Kitts and Nevis at 10 percent of output.

In the banking system liquidity is tight despite 2 percent inflation, and non-performing loans have reached one-tenth the total as private sector engagement has dwindled. “Further impairment” in official capacity to pay could pose solvency risk with the large aggregate asset position, and other institutional buyers could be tapped through the regional securities market to promote diversification and readier rollovers. The IMF staff summarizes that the East Caribbean union project is at a “crossroads” with dual transgressions jumbling the journey.