Next in importance to the damaging effects of the global economic crisis on Caricom’s exports of goods and services, and possibly also public and private investment flows to the region, I predict that when the information is finally forthcoming, the contagion effects of the global crisis on the region’s financial sector will be the most devastating. I make this prediction based on the fact that the contagion effects on the financial sector have already spilled over to the non-financial sectors of the real economy.
As we saw in earlier columns, the meltdown of the CL Financial and Stanford Financial Groups has had serious contagion effects in all Caricom states, except possibly two: Haiti and Jamaica. In The Bahamas, CLICO (Bahamas) is in the process of liquidation.
In Barbados the government has agreed to provide stand-by credit if needed for the local CLICO affiliates and is also helping to find buyers for CLICO’s insurance policies. In Belize the CLICO affiliate is under “judicial management.” The same is also true for Guyana where CLICO (Guyana) has a subsidiary operation in Suriname. In the Organization of Eastern Caribbean States (OECS), CLICO affiliates and in particular the British American Insurance Co have had serious contagion effects.
Too little too late!
The Stanford Financial Group meltdown has impacted mainly the OECS states. But in Guyana the Hand-In-Hand Trust Co has admitted to the compromise of its portfolio of assets held with the group. The company claims that this amount is about ten per cent of its total assets.
In light of all this, several readers have asked me to comment on how Caricom, as a regional integration movement, has responded to this meltdown given its dramatic trans-Caribbean impacts? In particular, they are asking for an assessment as to whether too little has been done and whether what has been done is too late. I shall respond to these queries in this and next week’s Sunday Stabroek column.
Before I begin, I should clarify a couple of issues. One is that I shall be deliberately concentrating on regional Caricom-level responses. However, these are not neatly separated from national responses, particularly when the contagion effects of the meltdown of the two groups spill over from the financial sector to the real sectors of the Caricom member states. This occurs because the financial contagion has produced losses in national income and wealth, as investors, policy-holders, creditors, suppliers and employees in these two groups suffer losses in their portfolios. This in turn leads to reduced demand and as we noted in recent columns, the CL Financial Group alone accounts for hundreds of thousands of persons affected.
Another issue to be clarified is that because of the greater level of integration of the OECS, a sub-grouping within Caricom, the OECS-wide cooperation in dealing with the impacts of the meltdown is far greater than that in Caricom as a whole.
OECS responses
The OECS sub-grouping, which was established in 1981 has cooperated over the years in financial matters way beyond that in Caricom. The sub-grouping operates with a common Central Bank – the Eastern Caribbean Central Bank (ECCB). It has a unified currency, the EC dollar, and it pools the external reserves of the seven member states. It also cooperates strongly outside the area of finance. Thus for example it has a joint OECS Secretariat and has a common Eastern Caribbean Supreme Court. Further, it practises joint external representation in overseas missions.
The Eastern Caribbean Central Bank has steered, coordinated and guided action in the OECS to contain the fallout from the Stanford Financial Group. It took over the operations of the local bank of the group based in Antigua and established in its place the Eastern Caribbean Amalgamated Financial Company (ECAF). The funding for this company was capitalized by the Antigua government and the local commercial bank (40 per cent), and four other banks in the OECS region holding 60 per cent of the capital injected into the replacement firm.
Liquidity support fund
The coordination did not end there as the sub-grouping convened a forum to put in place plans to contain the spillovers effect from the collapsed CL Financial Group. At present that is taking the form of setting up a Liquidity Support Fund (LSF) to protect the OECS financial sector from contagion effects. The goal is to capitalize this fund with US$80M provided as follows: (1) the OECS states among them are to provide US$10M; (2) the Government of Trinidad and Tobago is expected to provide US$50M, this is to be diverted from the pre-existing Petroleum Fund that the Government of Trinidad and Tobago had allocated to Caricom based on projected revenues and prices for oil and natural gas; (3) the Government of Barbados is expected to provide US$5M, and (4) the remainder of the funding is expected to be provided by regional (mainly CDB) and international organizations.
While it would be premature to determine if the measures would be enough to contain the contagion effects of the meltdown of the CL Financial and Stanford Financial Groups, it does indicate a pro-active and region-wide engagement of the global financial crisis and credit crunch. Unfortunately, as we shall see next week, comparable action has not taken place at the parent body level of Caricom.
To begin with Caricom did not meet at its highest deliberative level to engage the global financial meltdown until March of this year – six months after the crisis first reared its ugly head. That meeting took place at the 20th Inter-Sessional Conference of Caricom Heads of Government held in Belize (March 20).
Next week I shall continue from this point but it is worth noting that several analysts argue that the OECS is ‘closing the barn door after the horse has bolted.’
