News that the Government and Central Bank of Trinidad have intervened to take control of some of the subsidiary assets of one of the largest of the Caribbean’s transnationals, CL Financial, makes clear the dangers the global financial crisis has for everyone in the Caribbean.
As is now well known, the Trinidad government took action on January 30 in response to “increasingly serious” liquidity pressures affecting the company in order to “maintain the stability and integrity of the financial system.” It also did so, it said, because of the coverage and size of the group and the risks of contagion on the entire region.
The news sent shock waves far beyond the Caribbean as CL Financial owns assets valued at over US$100B in the region and globally in sectors ranging from banking and financial services, to energy, real estate, manufacturing, distribution and distilling. Although no definitive reason has been given for the difficulties facing the company, a mix of factors, led by the global financial crisis and the dramatic fall in methanol and real estate prices, appear to lie behind the liquidity crisis the company faced.
The Central Bank of Barbados with the endorsement of the Ministry of Finance also took action and announced that it was preparing to deposit up to US$5M with CLICO Mortgage & Finance Corporation (CMFC) and said it would provide access to liquidity support and inter-bank guarantees to cover lending by other banks to CMFC, if necessary.
At the same time the Eastern Caribbean Central Bank (ECCB) Monetary Council met to discuss the implications following expressions of concern from some OECS states about the possible fall-out from local CL subsidiaries. The council agreed to monitor the situation and to remain in close contact with neighbouring authorities. In an apparent sign of regulatory weakness, they observed that there was a need “to complete and enact legislation governing the regulation of the non-bank financial sector, including money services, insurance cooperative societies, and building societies.”
Throughout, CL Financial has insisted to stakeholders and the population at large that the Trinidad government’s action “in no way affects the operations of any of the other CL Financial subsidiaries operating in Trinidad, the region or internationally.” Despite this, successful companies in the rum sector have found themselves having to suggest that they are not for sale to international distilling groups.
In all of this the primary fear is that corporate and individual depositors will seek to withdraw their money, the region’s banks will cease to extend credit and interbank lending will dry up causing a melt-down in the regional financial system.
In this context, Barbados’ Central Bank Governor Marion Williams, has urged Barbadians not to withdraw their business from any subsidiary companies of CLICO. “Given that the financial system has the liquidity support of the Central Bank, and we have an arrangement for inter-bank guarantees, there should be no need to move investments,” she said.
In many ways and irrespective of the particular circumstances surrounding CL Financial, this was a crisis waiting to happen.
Some Caribbean jurisdictions have lagged far behind what has happened to business in the region and the way it is organised and regulated. They have not recognised that large groups operating in much the same way as the big global financial institutions have, if doubts should arise about their solvency, the ability to infect all economies and public sentiment.
Present developments undermine confidence in the regional financial sector and raise serious questions about why there is no common oversight and regulatory environment when companies have diversified and moved to operate regionally and internationally.
These latest developments also point to the risks to social cohesion. If banks and financial institutions cease to trust one another, the contagion spreads and credit is restricted, the ultimate outcome is a regional recession with many thousands out of work.
One welcome development in the week past in this respect has been the release of a report in Jamaica by the UWI-linked Caribbean Policy Research Institute (CaPRI). Their study, A New Social Partnership for Jamaica? focuses on recent consultations aimed at trying to bring government, opposition, trade unions, the private sector and others together to encourage growth and development, particularly at a time of economic crisis.
The report stemmed from a visit by Paul Haran – a former senior civil servant in the Irish government with intimate knowledge of the Irish social model – to engage in a dialogue around the Irish experience in meetings that included the Prime Minister and his cabinet and the Leader of the Opposition and members of her shadow cabinet.
The study points to a number of conclusions that while not necessarily replicable elsewhere, suggest that a similar approach may have value across the region. It notes that it is necessary for government to share elements of its authority to secure the support of workers and employers before going on to stress the importance of the home grown nature of the any partnership process. It also stresses that clear, realistic goals need to be set and that small incremental steps paying attention to detail were required in implementation.
The report’s executive summary also notes that support by the political opposition enhances the likelihood of success; social partnership requires its own home within the Office of the Prime Minister; and appropriate long term institutional leadership would ensure sustainability. It additionally observes that the labour force needed visible and tangible benefits for their wage restraint; social partnership should be part of an economic growth programme; it should not be an end in itself; and that the issue of gender needed attention, in Jamaica’s case, through the creation of a representative women’s organisation.
Space does not permit me to do justice to all it says, but it is clear that the worsening economic crisis makes urgent nation-specific approaches that try to create a consensus on a way forward, if finance ministers are to deliver politically acceptable budgets.
Developments surrounding CL Financial reinforce the message. Economic globalisation and the present financial crisis are taking the world into uncharted waters. If growth is to be stimulated, social cohesion and new forms of national partnership are essential.
Previous columns can be found at www.caribbean-council.org