June 3, 2020

Follow the Sun?

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Palm Trees with Sun Behind Them

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Is the recently-announced debt-reduction plan for Greece a viable solution to the most serious financial problem facing the world economy today? The example of Jamaica – the land of sun, sea and sand – could be a good indication of what might be expected to follow. Or is it?

Back in 2009 Jamaica faced its own crisis of a potential bankruptcy due to the inability of the Government of Jamaica (GoJ) to pay its maturing debt. After some hard negotiations, local bondholders agreed to a debt-exchange programme called the Jamaica Debt Exchange (JDX) in which high interest earning instruments were swapped for bonds with lower yields and longer maturities. This gave the Government some fiscal breathing space. And the result? The macro-economic variables since then point to record low interest rates, improved balance of payments results, a stable exchange rate, increased net international reserves, low inflation, a sustained rise in the stock-market and a return to economic growth. EBS Economics students will recognise these as being some of the results achieved when the “crowding out” effect of Government in the economy is reduced.

It’s easy to say that all of these positives may also accrue to Greece once its debt write-off is fully implemented. But is what we are seeing a case of spurious correlation? If so then the Caribbean breeze may find it hard to cool the Mediterranean heat.

Some observers point out that the JDX might not really have been a new knight in shining armour. They also contend that it is questionable how much of the improved macro-economic showing is attributable to the programme. Jamaica has a small, open economy that is heavily dependent on international developments for earnings and expenditure. The slow improvement in the world economy, with the moderation of oil prices and a return to growth (albeit weak) in the major trading partners, coincided with the implementation of the JDX. The absence of other exogenous shocks, such as major natural disasters, also provided well-needed space for economic improvement to take place.

Several other differences between Jamaica and Greece imply that similar results may not be achieved. Firstly, the JDX was offered primarily to bond-holders resident in Jamaica. The ripple effects of its move on issues such as decreased investor confidence, the outward flow of capital and the increased price of Jamaican debt on international bond markets (which then impacts on future Government inflows and expenditure) would then be contained. More importantly, the contrasting political, economic and social life  – aptly demonstrated by the many instances of labour unrest in Greece – imply that the response to the effort may vary.

Undoubtedly, the JDX has contributed to the positive economic results seen in Jamaica. However, in lieu of a full study assessing its impact, it may be wise not to predict that the same outcomes will be seen in Greece. One thing that will occur though is a cementing of the old adage in the minds of many – necessity is the mother of invention!