Barbados seen turning to IMF after three-notch downgrade

Thu Jun 5, 2014 6:17pm EDT

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NEW YORK, June 5 (IFR) - Barbados is expected to turn to the International Monetary Fund (IMF) for help, after a three-notch credit downgrade from ratings agency Moody's dealt one last blow to the heavily indebted nation.

Officials from the Caribbean island will engage in fresh talks with investors beginning on June 23 during meetings organized in London and New York by Geoffrey Bell and Company, a longtime financial advisor to the government.

The island's deteriorating fiscal health and sub-par growth have long been a concern for accounts holding some US$500m plus in dollar and sterling bonds.

Last year the sovereign was forced to ditch a new bond issue and liability management operation as it approached investors for the first time as a junk credit.

Ultimately it resorted to a loan syndicated through Credit Suisse to cover budgetary needs.

The fund, which has so far engaged with Barbados only on a consultative basis, is scheduled to conclude a routine visit to the country this week.

"This is a regular, periodic staff visit planned for some time to review recent economic developments and discuss the main policy priorities," said a spokesman for the fund.

CLOSER TO THE IMF

With international reserves of US$690m as of the end of March, Barbados can comfortably meet interest and principal payments worth some US$106m this year.

Yet with debt-servicing costs expected to nearly treble to US$307m in 2015, the island could be forced into accepting a greater involvement of the IMF in its finances.

"The government will likely formalize the heretofore consultative role of the IMF into that of a balance of payment adjustment program," said Michael Roche, emerging-markets fixed-income strategist at the Seaport Group.

"It would probably entail a balance of payment loan, a domestic debt restructuring and a flexible currency adjustment, similarly to what happened in Jamaica in 2010."

While the government has indicated it intends to implement economic adjustments on its own, many argue that any deal with the IMF would be the best course of action, in spite of the stigma often associated with requesting multilateral assistance.

"If you are implementing fiscal austerity anyway, why not get the IMF on board and receive some funding as well," said Carl Ross, head sovereign analyst at Boston-based Grantham Mayo van Otterloo.

In lowering the sovereign's rating to B3 from Ba3 this week, Moody's said it expected the island's fiscal position to keep deteriorating against a backdrop of sluggish economic growth and a growing debt stockpile.

Barbados reported a deficit of over 11% of GDP for fiscal 2013/14, while interest payments now absorb 30% of government revenue, said Moody's.

Rival Standard & Poor's rates the country BB-.

LAST BLOW

A number of market participants shrugged off the Moody's action as an overdue confirmation of a prolonged deterioration in the island's credit metrics.

"(This is) not really a surprise, given the negative fiscal trends and the government reluctance to implement sharper spending cuts and an IMF program," said one US-based investor.

Others, however, argued the move carries greater significance for the country, effectively shutting it out of the international capital markets.

"Moody's rating action has effectively closed the door on Barbados' access to international private capital," said Seaport's Roche. (Reporting by Davide Scigliuzzo; Editing by Paul Kilby and Marc Carnegie)

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