Dear Editor,
The ordinary citizen does know, maybe doesn’t even care to know, how interest rates operate. All they know is that its charge is included in payments for mortgages, car loans, hire purchase plans, and such. They need to know more, and I share a simple primer so that the unknowing may understand the game. Further, I present an idea of how businesses and the real world operate when interest charges are involved, and how they are hurt. I do this within the context of oil.
There are calls for disclosure of the interest rate that Guyana is paying for the loans that Exxon take out using our oil as collateral. Proven reserves are great collateral. So far, the calls for interest rate information on the loans have fallen on deaf ears, with the PPP Government stonily silent. The question is why. That aside, I now deliver the little primer promised.
Banks charge businesses interest for using other people’s money. Notwithstanding their many useful functions, this is the racket that make banks flourish. That is, taking other people’s money (deposits) and lending it out for a price. The interest rate charged by banks is the cost of money. Bigger and better customers (businesses) enjoy financial economies of scale, lower rates, from borrowing in big numbers, enabling them to negotiate hard and successfully with banks. On Wall Street, brokerage houses, investment houses, hedge funds, and others borrow huge amounts, and then lend those out, in turn, as part of their financing operations to their customers.
Here is the key: they always tack on something for themselves on the interest rate at which they borrowed. This increased rate is what their customers must pay. On $100,000 sticking on an extra 1% in interest is simply $1,000 annually. Nobody cares. But when the loan sought is 1 million or 10 million or 100 million, then serious interest charges/payments are involved. That interest rate differential adds up for lender and borrower.
Now consider Exxon is borrowing billions, in aggregate, to finance its (our) operations, and whatever the company’s lending institutions charge it, I would assert that there is then the layering on of 1% to that starting interest amount charged. On a million it is $10,000 in interest using the assumption that Exxon adds on a mere 1% to whatever it is charged. On a billion, it is ten million in extra charges annually. On five billion, it is fifty million, and this is only for a 1%. If Exxon is adding 2% to what it pays, Guyana is looking at 100 million in interest charges that the oil company is making off our backs, outside of regular profits.
This increases as borrowings multiply, years extend, and compounding features. It explains this stubborn political resistance to sharing these little bits of information that give Guyanese an idea of how Exxon profits on the sly. As an aside, I have been near discussions on rates and charges, and how to split, who pays. In bond market parlance, 1 per cent consists of 100 basis points. I have observed many corporate dogfights and bloodbaths for less than 10 basis points, a mere tenth of one percent. The stakes are usually high, the winner’s spoils rich, thus the ferocity, the unimaginable greed; this is among competitors, sometimes, even among partners. Using this as background, I place before my fellow Guyanese, how it matters what Exxon is charging us as interest rate for loans that it takes out to do its work here, and passes on to us (to incentivize itself). I gave a glimpse of corporate fratricidal wars for basis points, tiny percentage fractions, to feather their nests. Imagine Guyana’s lot. Here Exxon is in heaven. The PPP Government aids and abets its skullduggeries, the Opposition works on developing its mojo, and most citizens care not.
From Exxon’s perspective, there is profit as memorialized in contract numbers, then there are those backdoor and sideways profits that are all part of capitalism’s bounteous practices. It helps that most Guyanese are disengaged, though they are the ones paying those gaming, cheating them. Yes, it is Guyanese debt.
Sincerely,
GHK Lall
