Small island-nation. Check.
Host to a plethora of banks and financial institutions. Check.
Rumours of imminent bankruptcy. Check.
This time, however, the state involved is the Cayman Islands — the Caribbean country beloved of hedgies and tax exiles.
And the rumours, it seems, were kicked off by this story, in the Guardian:
The white sands of Seven Mile Beach on Grand Cayman have long caressed the toes of the world’s wealthiest financiers, who flock to this balmy spit to avoid the taxman’s prying eyes.
But the world’s biggest hedge-fund venue and fifth-biggest bank centre is now threatened, as the government of the Cayman Islands heads for bankruptcy — unable to pay its own staff and facing the prospect of introducing taxes as income from the world’s shrunken financial system collapses.
But the situation is about to get worse after the British government, which has ultimate responsibility for the islands, last week refused to bail out the Caribbean idyll. It is not convinced the country will have the money to pay it back.
Shock, horreure — the Cayman Islands is so desperate for cash, it is even considering introducing income and sales taxes, according to the paper.
Of course, the situation is all very tragically ironic. Caymanians enjoy the highest standard of living in the Caribbean with an average income of around $43,800, according to the CIA World FactBook. The problem, it seems, is that tourist revenues, which account for circa 70 per cent of the country’s GDP, have fallen off a cliff, while the license fees it earns from financial institutions (based on number of employees) have also shrunk.
But why speculate?
On Thursday last week, the Caymans’ Honourable Premier Designate, McKeeva Bush, himself spoke out on the Caymans’ cash conundrum, and he cites causal factors that are much more specific — namely the construction of two new high schools and the loose monetary policy of the previous government:
The reasons Government is experiencing difficulties presently which are more acute than previous years are twofold:
1. Our cash outflows have ballooned greatly in this financial year because of huge capital expenditures that have to be met in respect of projects such as the two (2) new high schools and the new Government Administration Building. The UDP Government believes that the schools could have been far more modest and less costly – this would have significantly alleviated much of our cash outflows on capital projects; and
2. The cash balance in Government’s operating bank account at the start of this financial year, on 1st July, was very low – which meant that there was little cash available to help us get through the summer months when Government usually experiences operating deficits.
In fact, the government is CI$4.3m (USD $5.3m) overdrawn on its bank account, which has a maximum overdraft facility of CI$15m.
According to the Premier Designate’s own figures, it seems the government’s operating bank account had CI$14.4m as of July 1, 2009, meaning, if our sums are right, the country has burned through CI$18.7m in a little over two months.
Admittedly, these are not the government’s only cash balances — it also has reserve/restructured funds — but it does appear to be in a bit of a precarious position, in terms of monies. Outlays for September are expected to total CI$79m, while revenue is expected to be CI$30m. That in itself would push the government beyond its overdraft limit.
In any case, the Caymans’ Premier Designate has a plan:
We will meet our required Cash Outflows during the month of September 2009 using a combination of:
1. continuing to utilize our overdraft facility as a source of funding to complement revenues to be received during September;
2. seeking approval from the UK Government to use some of the loan funds facility that we have in place with a local bank. In this respect Government will be making the submission requested by the UK FCO, next week; and
3. advancing our discussions that we have already commenced on ‘private financing initiatives’ in respect of the two (2) new high schools and the new Government Administration Building.
And he is eager to stress that the country is not going bankrupt, viz Sunday’s Cay Compass:
The leader of government business also used Moody’s confirmation of Cayman’s stable credit rating outlook to refute international media reports that the Cayman Islands was bankrupt.
“We can confirm that these accusations [of bankruptcy] are incorrect,” he said. “Indeed the recent statement made by Moody’s confirms that the Cayman Islands remains one of the most highly rated financial services jurisdictions in the world.”
Related links:
Troubles in paradise – FT