Economist recommends JDX II

Dr Carl Ross, economist and managing director for investments at American firm Oppenheimer, is suggesting use of what he describes as a "nuclear option" for Jamaica, involving a haircut for bondholders and other holders of debt akin to the shake-up executed by auto giant General Motors which saw that company return to profitability in 2010 after years of poor performance.

Ross presented a what-if scenario of what Jamaica could accomplish were its estimated J$150 billion interest bill would be shaved in half to J$75 billion and half of the savings were allocated to deficit reduction.

That would leave about J$40 billion to be split among capital projects, and to invest in security and education, he said, while speaking last Thursday at the Jamaica Chamber of Commerce's (JCC) annual awards dinner.

Describing Jamaica as sinking "into a state of economic atrophy, underinvestment, and under-achievement", Ross advocates the cutting of the annual interest bill on the total government debt - external and domestic. The outcome of that move, he said, would create conditions under which the country could achieve five per cent growth.

"Jamaica Inc needs to massively de-leverage and come out on the other side a stronger company," Ross said, adding that the impact on the banks and international capital markets might not have the fearsome consequences that are touted in some sectors.

Ross illustrates the effect of his plan with the story of General Motors whose share of the US automobile market peaked at 51 per cent in 1962, but by the 1970s and 1980s, was in a slow decline.

"GM was forced into bankruptcy in 2008 after creditors refused to accept a haircut. Bondholders were forced to take a 70 per cent haircut, workers were stripped of a lot of their outdated benefits, 40 per cent of dealerships were closed. In other words, the company was cut down at the knees," said the economist.

But, the result was a change in company fortunes.

"The company recently announced its first annual profit since 2004. After about US$90 billion in accumulated losses, the company earned nearly US$5 billion in 2010, in what was hardly a banner year for the US economy. It was able to return some money to workers in the form of profit-sharing checks," he said.

Dealing with known objections to debt default, Ross said it was his view that firstly, the banks would continue to lend money.

"Last year's JDX (Jamaica Debt Exchange) was supposed to put a ton of stress on the banks. But I haven't seen one financial institution go under," he said.

"Not a dollar of the US$500-plus billion financial stability fund put forth by the IMF was drawn, and no financial institution that I know of even lost money last year. Moreover, are the banks knocking down your doors to lend you money right now?"

Addressing the fear of capital markets being closed to Jamaica, Ross said if the debt restructuring plan were executed properly, it would involve IMF and World Bank financing, and that the lack of access would be a positive development "as it will constrain the politicians from wasting money," he said.

The rating agencies already consider the JDX to have been a default, he told the JCC dinner, "including an external debt default", because some of that debt was US-dollar denominated.

Jamaica, he said needs "a phenomenal turnaround, and it really involved what I'd call 'the nuclear option' - a massive haircut accruing to creditors and other stakeholders."

After fixing the balance sheet, the country should be able to grow above five per cent, he said.

"Don't fear the so-called nuclear option, if your policymakers drum up the courage to use it, for, I believe, like GM - and if done right - it could usher in a new era for Jamaica in which its full potential can finally be realised."

austanny@yahoo.com