Debt restructuring: Belize defaults on external debt


Felix Salmon
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The tiny Caribbean nation of Belize hasn’t been able to catch a break since being devastated by four hurricanes and major storms between 1998 and 2002. The cost of rebuilding following those storms, along with a certain degree of fiscal recklessness, resulted in a massive increase in Belize’s debt: private-sector obligations alone rose from $296 million in 2001 to $646 million in 2003 – an increase that has now led to imminent default.

Belize has tightened its fiscal belt: a deficit of 8% of GDP in 2004/05 became just 3.1% in 2005/06. The country’s debt stock is also down from its highs: the private sector is now owed $574 million.

But Belize’s efforts proved to be too little, too late, and in August the country announced a “rearrangement” (effectively a default) of its external debts. Belize’s bonds, pricing in an expected haircut, are now trading in the mid-70s to yield about 16%; Richard Segal, head of emerging market research at Argo Capital Management in London, says that they’re “trading at a post-rescheduling yield of 11.5% to 12%”.

The economy is certainly in sufficiently bad shape to warrant a restructuring. Current account deficits average about 20% of GDP, and uncommitted foreign reserves are forecast to end 2006 at just $43 million – less than a month’s worth of imports. Next year, Belize faces a put option on its $76 million bond due in 2014, and it has no obvious way either to pay the money or to refinance. Already, the effective weighted average interest rate on the external public debt is a whopping 11.25%, and interest payments take up 26.4% of the country’s tax revenues.

No one yet knows exactly what Belize’s debt restructuring will look like, although it will almost certainly be in the format of a “voluntary” exchange of old bonds for new bonds. (The government, of course, will stop paying interest on the old bonds when it starts paying interest on the new ones.)

Belize's debt woes
Public debt stock by creditor type
Source: Ministry of finance & central bank of Belize

Belize has asked its creditors to form a committee: the country clearly wants them on board with whatever it chooses to do.

One option is a simple haircut: bondholders would simply exchange their old paper for new bonds carrying the same coupon but a lower principal amount. More likely seems to be the prospect of a maturity extension coupled with some kind of relief on interest payments: perhaps half the coupons for the first three or four years might be capitalized, and added to the principal amount instead of being paid in cash.

Carl Ross, head of emerging markets research at Bear Stearns, thinks that bondholders might end up with a pretty attractive deal, which would value the old bonds at 87.5 cents on the dollar. But, he cautions, his outperform recommendation “is appropriate for risk-tolerant investors only, as under several plausible scenarios (including, we think, the government’s initial position) bond valuations could be significantly lower than current levels”.

There is also the risk that the exercise will address Belize’s liquidity problem while ignoring its solvency problem. “If they don’t put their debt on a more sustainable footing, they could come back in three or four years with the same problems,” says Richard Francis, an analyst at Standard & Poor’s.

At the same time, however, says Francis, “they want to have relatively good relations with their creditors”. Belize knows that its current bondholders are the same people who they’re going to be asking for new money in a few years’ time.