The Malta
There are four ways by which the national debt could be brought down
from the current 72 per cent of GDP to under 60 per cent, or at least firmly
pointing south in that direction, in order to gain the credentials for acceding
into the euro in 2008.
The most challenging and most rewarding method to achieve this is to grow the economy at a faster pace than the rate of debt accumulation. So while the absolute level of the debt will keep growing through the accumulation of the dwindling budget deficits, in relative terms to the GDP, the size of the debt will start reducing as the GDP will be rising at a faster rate.
This is the most logical and practical way to solve the debt problem, but government seems to have given up on it. It projects real growth rates far below our capacity and below those of most of our trading partners or competitors.
For the economy to grow at a faster rate, we need substantial private sector investment in productive capacity and the injection of substantial flexibility in the economy to render it globally competitive and agile to grasp opportunities as they arise. In the current economic scenario, both aspects are conspicuous by their absence rather than by their existence, and our rate of exchange regime remains a barrier to their realisation.
Another way of reducing the ratio of debt to GDP is by creating exceptional non-recurring one-off revenue flows which will help either to reduce the incremental borrowing needs and/or reduce the absolute level of debt itself. Such exceptional non-recurring revenue flows generally come in two distinct forms.
Firstly, through dismantling past reserves. The government has been doing this since 1998 by taking over the sinking funds of maturing government loans, which are rolled over without the obligation to build a fresh sinking fund. The sinking funds accumulated for the old loans are taken as a special financing item, which reduce the need to raise loans to finance the annual deficit.
Secondly, exceptional one-off revenues are generated by selling off public assets through privatisation. The problem with creating these one-off revenues by dismantling past reserves and through privatisation is that the government has already sold most of its assets and after the upcoming privatisation of its 60 per cent holding in Maltacom and 40 per cent in MIA, not much will be left to sell.
The third way of reducing the debt to GDP ratio is by incurring budget surpluses, which is then used to pay off debt. In the local context this is impractical: we have a slow-growth economy which is trying to solve a chronic budget deficit and there are no practical prospects of running budget surpluses anywhere in the near future without causing a deep economic slump which will kill rather than cure the patient.
Having exhausted the above-described three ways of addressing the overgrown debt problem, the government has turned to the fourth way, involving creative financing methods in order to appear to be solving the debt problem without actually doing so.
This fourth method carries the cool name of “securitisation”, which gives a respectable label to old-fashioned “cooking the books”.
Read the following extracts from the 2006-2102 pre-budget document attractively stamped all over with “A Better Quality of Life” branding.
“Government is looking at the possibility of moving forward the idea of securitisation of property. This entails the formation of a public company owning government property with an invitation to the public to invest in it leaving its management in private hands. The aim is to commercially exploit to the full a major government asset without the need to sell that asset but rather to create an investment vehicle open to the public.”
This might look like a complicated financial structure but in reality it is quite simple. Through cool securitisation, the government could sell Castille to a government-owned public company which raises bonds from public subscription to pay the funds to the government.
The government will then lease back Castille from the public company to give it cash flows to pay interest to bond holders and agree either to buy back the property at the end of the loan or to roll over the lease for a further period if the public financing vehicle rolls over the maturing bonds into new bonds.
Suppose Castille is thus valued at Lm50 million and is sold at this price to a government-owned company called Castille Wonder Land plc (CAWLA). CAWLA would raise 15 year bonds at, say, five per cent for Lm50 million to pay the government for the acquisition of Castille. The government will pay CAWLA rent/lease of Lm3 million a year, which enables CAWLA to pay annual interest of Lm2.5 million and keep an annual half-a-million reserve for other running expenses.
The government applies the Lm50 million to pay off outstanding public debt and somehow has to invent revenue enhancements (taxes) to cover the annual lease outgoings of Lm3 million without increasing the deficit. After 15 years the whole deal is reversed or renewed, depending on the rate of interest and the state of public financing prevailing at the time.
“Government will present to parliament a Securitisation Act to make possible the conversion of receivables and other assets to securities that can be traded in the capital markets”
This quote from the same document extends the above concept not only to property but also to receivables. So the government could sell its annual receivables (eg annual profits from the Central Bank) in order to obtain an immediate lump sum to reduce outstanding public debt and come within the Maastricht criteria.
I get the impression that government is focusing on this fourth hi-tech way to solve the public debt problem through securitisation of public assets and revenue flows rather than on delivering a durable real solution to the problem.
The let’s pretend game continues. It could give the impression of solving or reducing our over-blown public debt problem. Whether it delivers a better quality of life is another matter.
The most challenging and most rewarding method to achieve this is to grow the economy at a faster pace than the rate of debt accumulation. So while the absolute level of the debt will keep growing through the accumulation of the dwindling budget deficits, in relative terms to the GDP, the size of the debt will start reducing as the GDP will be rising at a faster rate.
This is the most logical and practical way to solve the debt problem, but government seems to have given up on it. It projects real growth rates far below our capacity and below those of most of our trading partners or competitors.
For the economy to grow at a faster rate, we need substantial private sector investment in productive capacity and the injection of substantial flexibility in the economy to render it globally competitive and agile to grasp opportunities as they arise. In the current economic scenario, both aspects are conspicuous by their absence rather than by their existence, and our rate of exchange regime remains a barrier to their realisation.
Another way of reducing the ratio of debt to GDP is by creating exceptional non-recurring one-off revenue flows which will help either to reduce the incremental borrowing needs and/or reduce the absolute level of debt itself. Such exceptional non-recurring revenue flows generally come in two distinct forms.
Firstly, through dismantling past reserves. The government has been doing this since 1998 by taking over the sinking funds of maturing government loans, which are rolled over without the obligation to build a fresh sinking fund. The sinking funds accumulated for the old loans are taken as a special financing item, which reduce the need to raise loans to finance the annual deficit.
Secondly, exceptional one-off revenues are generated by selling off public assets through privatisation. The problem with creating these one-off revenues by dismantling past reserves and through privatisation is that the government has already sold most of its assets and after the upcoming privatisation of its 60 per cent holding in Maltacom and 40 per cent in MIA, not much will be left to sell.
The third way of reducing the debt to GDP ratio is by incurring budget surpluses, which is then used to pay off debt. In the local context this is impractical: we have a slow-growth economy which is trying to solve a chronic budget deficit and there are no practical prospects of running budget surpluses anywhere in the near future without causing a deep economic slump which will kill rather than cure the patient.
Having exhausted the above-described three ways of addressing the overgrown debt problem, the government has turned to the fourth way, involving creative financing methods in order to appear to be solving the debt problem without actually doing so.
This fourth method carries the cool name of “securitisation”, which gives a respectable label to old-fashioned “cooking the books”.
Read the following extracts from the 2006-2102 pre-budget document attractively stamped all over with “A Better Quality of Life” branding.
“Government is looking at the possibility of moving forward the idea of securitisation of property. This entails the formation of a public company owning government property with an invitation to the public to invest in it leaving its management in private hands. The aim is to commercially exploit to the full a major government asset without the need to sell that asset but rather to create an investment vehicle open to the public.”
This might look like a complicated financial structure but in reality it is quite simple. Through cool securitisation, the government could sell Castille to a government-owned public company which raises bonds from public subscription to pay the funds to the government.
The government will then lease back Castille from the public company to give it cash flows to pay interest to bond holders and agree either to buy back the property at the end of the loan or to roll over the lease for a further period if the public financing vehicle rolls over the maturing bonds into new bonds.
Suppose Castille is thus valued at Lm50 million and is sold at this price to a government-owned company called Castille Wonder Land plc (CAWLA). CAWLA would raise 15 year bonds at, say, five per cent for Lm50 million to pay the government for the acquisition of Castille. The government will pay CAWLA rent/lease of Lm3 million a year, which enables CAWLA to pay annual interest of Lm2.5 million and keep an annual half-a-million reserve for other running expenses.
The government applies the Lm50 million to pay off outstanding public debt and somehow has to invent revenue enhancements (taxes) to cover the annual lease outgoings of Lm3 million without increasing the deficit. After 15 years the whole deal is reversed or renewed, depending on the rate of interest and the state of public financing prevailing at the time.
“Government will present to parliament a Securitisation Act to make possible the conversion of receivables and other assets to securities that can be traded in the capital markets”
This quote from the same document extends the above concept not only to property but also to receivables. So the government could sell its annual receivables (eg annual profits from the Central Bank) in order to obtain an immediate lump sum to reduce outstanding public debt and come within the Maastricht criteria.
I get the impression that government is focusing on this fourth hi-tech way to solve the public debt problem through securitisation of public assets and revenue flows rather than on delivering a durable real solution to the problem.
The let’s pretend game continues. It could give the impression of solving or reducing our over-blown public debt problem. Whether it delivers a better quality of life is another matter.
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