The East Caribbean’s Fraying Union Label
The East Caribbean Central Bank, which manages the 2.7 to the dollar currency peg for eight island monetary union members, marked its 30th anniversary with a major report lamenting status as a “microcosm of euro area difficulties” including unsustainable debt, lack of fiscal integration and financial system weakness. It notes social sector strides and “stable” democracies are offset by rising poverty and unemployment and short-term policies that erode lasting economic growth. Although capital accounts are open and a regional government securities market operates through a common exchange customs union and bank and non-bank supervisory norms have yet to be established. Recession has prevailed the past few years and tourism competitiveness could improve. High public debt puts the group among the most vulnerable developing countries and wide of the 60 percent of GDP Maastricht-modeled target. It is evenly split between local and external, with the latter mostly due to the Caribbean Development Bank. Tax revenue is just 20 percent of national income, with many exemptions and insufficient capacity to collect and track VAT. State spending on wages, pensions and loss-making companies is a large budget drag, and half the ECCU—Dominica, Grenada, St. Kitts and Nevis and Antigua—completed loan and bond restructurings the past decade. In the banking sector, foreign owners especially from Canada represent 50 percent of assets and liabilities and intervention was recently required due to the Texas-based Stanford Financial fraud. Indigenous units were also taken over post-crisis as a shared deposit insurance scheme is under study. Credit unions, particularly in Dominica and Montserrat, play a big role and regulation has lagged, according to the document. The insurance industry suffered from the CL Group’s collapse in Trinidad and Tobago with “chronically under sourced” oversight as health policyholders still seek relief. Primary Treasury bill issuance dominates capital markets with secondary trading awaiting a dedicated dealer push. Corporate debt and equity activity is minimal and could rise with links to neighboring Caribbean stock exchanges. Offshore centers are most active in Anguilla, Antigua and Barbuda and St. Kitts and Nevis and have signed tax information sharing pacts with international counterparts but anti-money laundering compliance could go further.
The currency board has brought low inflation and interest rates but excludes lender of last resort scope. The World Bank’s Doing Business rankings score low on credit access, insolvency, and contract enforcement as Grenada embarks on another debt rescheduling exercise after 2005’s hurricane. The prime minister described the load as a “binding constraint” and the haircut on its $200 million bond is expected to approach the 50 percent for St. Kitts and Nevis in 2012. Commercial negotiators include Franklin Templeton, GMO, and T Rowe Price, who will be hard-pressed to demand repayment with the debt-GDP ratio at 100 percent and unemployment at 30 percent even if their position is united.
