ST GEORGE’S, Grenada — The government of Grenada said on Friday that circumstances have forced it to undertake a comprehensive and collaborative restructuring of its public debt, including its United States and Eastern Caribbean Dollar Bonds due in 2025.
The Grenadian economy has been severely affected by the global financial crisis and — despite a debt restructuring in 2005 and the reforms implemented over the last five years under IMF-supported programmes — has been unable fully to recover from the devastation wrought by Hurricanes Ivan and Emily in 2004 and 2005, respectively. Notwithstanding Grenada’s aggressive efforts to achieve macroeconomic stability, public finances are currently unsustainable.
An increasingly difficult financing situation in the second half of 2012 prevented Grenada from paying the September coupon on its US Dollar Bond Due 2025 on the due date. The coupon was eventually paid just before the expiry of the applicable grace period after Grenada, with much effort, was able to borrow the required US$4.4 million from local sources on a short-term basis. With further borrowing no longer a viable option, Grenada confirmed on Friday that it will not have the resources to pay the coupons that fall due on its US Dollar and EC Dollar Bonds due 2025 on 15 March 2013. Moreover, the government does not expect to have the funds to do so within the relevant grace periods.
Both the US Dollar and EC Dollar Bonds are based on step-up coupon structures. The coupons increased from 2.5% to 4.5% in September 2011, and are scheduled to step up again, to 6.0%, in September 2013. Further step-ups are scheduled for 2015 and 2017, with the final step- ups, to 9%, scheduled to take place in September 2018.
Grenada’s economic recovery from Hurricanes Ivan and Emily was cut short by the onset of the global financial crisis; subsequently causing a contraction in gross domestic product that averaged -1.2% a year from 2008 to 2012. By way of comparison, the annual growth assumption that underpinned Grenada’s 2005 debt restructuring (a restructuring that involved no haircut to the principal of the debt stock) was 4.7% per annum.
This crisis has had a dramatic effect on the country and on its public finances, marked by a decline in economic activity, investment levels and tax receipts. The economy has also endured a sharp reduction of grants and concessional financing, together with losses brought about by failures in the regional financial system.
Grenada has responded to these challenges in part by introducing new taxes and reining in expenditure. In July 2011, the IMF concluded that public expenditure had fallen significantly, in both real and nominal terms, from its 2007 level.
With the economy and revenue base shrinking in real terms, these expenditure cuts have not been sufficient to place the public debt on a sustainable footing. Expenditure cuts have also limited the government’s countercyclical effort and ability to provide a safety net for the more than one in three Grenadians in the workforce who are now without work.
“The global financial crisis has taken a heavy toll on the country, and aggravated the severe debt overhang that continues to weigh down our economy,” said Dr Keith Mitchell, Grenada’s prime minister and minister of finance. “It is now time for Grenada to confront the fact that it cannot continue to pay its debts on current terms, and that the restoration of growth requires the debt overhang to be resolved. We need a fresh start, and it is therefore imperative that we approach our creditors promptly to discuss an orderly restructuring of our liabilities.”
The government will shortly initiate contacts with creditors, including holders of its 2025 Bonds and the trustees for those instruments, so that discussions on the restructuring of the affected debt instruments and facilities can commence.
The government has confirmed that Grenada’s Treasury Bills registered on the Regional Government Securities Market (RGSM) will not be affected by the restructuring exercise.