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Bermuda gets credit warning from Moody's

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(Globalpost/GlobalPost)

Cash-strapped Bermuda has received a fresh warning its credit rating may be downgraded as the island's debts mount in the midst of a four-year recession.

International ratings agency, Moody’s Investors Service, on Wednesday placed Bermuda’s Aa2 rating on review for possible downgrade.

The warning came just days after another leading agency, Standard and Poor’s (S&P), said it might downgrade the island’s credit rating. S&P affirmed Bermuda’s "AA-/A-1+" long- and short-term issuer credit rating last Thursday, but revised its outlook from "stable" to "negative".

New York-based Moody’s placed the island’s Aa2 government bond rating on review for possible downgrade.

“The review is prompted by the steep rise in government debt since the global financial crisis and by the prospect of further rises in the coming two years. In addition, the island's economy remains in recession, making efforts to correct the fiscal deterioration more difficult.”

A One Bermuda Alliance (OBA) government spokesman said a statement would be issued later on Moody’s assessment. A ratings downgrade would likely result in government having to pay a higher rate of interest on its borrowings.

Government inherited a national debt of US$1.4 billion when it came to office following last December's general election. The OBA has since raised the borrowing debt ceiling by a billion dollars to US$2.5 billion, saying it would not have otherwise been able to pay its bills. The Progressive Labour Party (PLP) ran the country for 14 years.

In its ratings rationale, Moody’s noted that Bermuda has one of the highest per capita incomes in the world (above $80,000) and that the island’s regulatory institutions have allowed the international business sector to develop.

“Despite its recent rise, government debt started from a very low level and is still at a level only slightly higher than the median for countries in the Aa2-A1 rating range,” Moody’s said.

“The review for possible downgrade is prompted by the upward trend in government debt that has occurred since 2008, with the ratio of government debt to GDP rising from a low 5.9 percent at the end of the 2007-08 fiscal year to an estimated 28.1 per cent at the end of 2012-13.

"Furthermore, the newly-elected government's first budget, introduced in February, projects a large deficit that will raise this ratio further in the coming year to well over 30 per cent.”

Moody’s said it believed the rise in government deficits and debt was primarily due to a prolonged period of declining GDP, “which began in 2009 and looks likely to continue through 2013. Moderate growth may resume in 2014, but the long-term decline in the tourism industry and less dynamic growth in the insurance sector could limit the pace of future growth”.

In its statement, Moody’s said its rating review will focus on the government’s plans to address the rising debt and implement reforms to boost economic growth and warned “a downgrade could result if the review concludes that debt will likely continue to rise.

http://www.globalpost.com/dispatch/news/asianet/130404/bermuda-gets-credit-warning-moodys