It is a question of time before the EU starts to tighten the screws on those countries that have significant excesses in their annual fiscal deficit and their debt to GDP ratios. When the Fiscal Pact, agreed to by all EU countries, except the UK and the Czech Republic, earlier this year comes into force it is inevitable that the management of national debt will be more closely scrutinised by the Brussels bureaucrats. Sanctions for non-compliance with tough debt reduction programmes will inevitably be enforced.

The time is right to set up a debt management agency that is independent from the Treasury- John Cassar White

Malta does not have the tragic debt mountain of Greece or Italy, but we are still substantially out of line with the Fiscal Pact requirements. The way we are managing our national debt is not sufficiently robust to inspire confidence in the international institutions like the rating agencies, the IMF and the European Commission that can make or break us with their judgments on our credit worthiness.

One of our main debt management weaknesses is that we often look at our national debt purely from the statistical perspective. For instance, the debt of certain publicly-owned entities like Air Malta and Enemalta is not included with the official public debt incurred directly by the government. This is technically correct according to the Eurostat rules, but hardly effective in helping us understand the height of the debt mountain that we need to climb to control this toxic element of our public finances.

Over the past several decades, state-owned entities like Air Malta, Enemalta and various other organisations borrowed massive amounts of money from local and foreign banks to finance their capital and recurrent expenditure. But unfortunately they also borrowed to finance their losses. Up to some time ago, banks were not excessively worried when providing funds to these entities because they could rely on government guarantees, letters of comfort or simple reassurances that the government would not ever dream of killing its lame ducks without first repaying the banks that have kept these proverbial ducks quacking for quite some time.

Let us look as some examples. Enemalta’s financial management was often more influenced by political considerations than purely commercial ones. The result is that today this monopoly has a debt mountain of its own that is in the region of €700 million, mainly owed to banks but also to the government in the form of unpaid taxes.

There was talk of setting up a special purpose vehicle to restructure this massive debt. I fear SPVs are being considered as magical tools that will help us escape the real pain of reducing debt. They are not, and I still need to be convinced that Enemalta can service this massive debt without suffocating its customers with excessive electricity rates.

Air Malta’s restructuring plan details are still under wraps – at least where the financing details are concerned. We know that part of the financing will come directly from the government but undoubtedly a substantial amount of the restructuring cost will be financed by local banks. Some of our banks may have a concentration of government-related debt on their balance sheet that renders them vulnerable should Malta’s credit rating be reduced further.

While over the past few years some progress has been made in the management of our public finances (according to rating agencies, the IMF and the European Commission) much of this improvement came from one-off measures like tax amnesties, rather than from structural reforms that help to balance our public income and expenditure in a more sustainable way.

Some of our foreign-owned banks may prefer to stick to their head office credit policy guidelines when dealing with applications for loans from the local public sector. Other local banks may still look at local sovereign debt as practically risk free. The sovereign debt crisis that started in 2007 should have convinced them that this is a dangerous perception. The government should also avoid using ‘moral suasion’ with local banks to convince them to plug holes in its annual budget.

The time is right to set up a debt management agency that is independent from the Treasury to deal with our national debt, including the debt of state-owned entities, in a coordinated way. Such an agency should be made up of technical people who can act independently and who enjoy the trust of both our main political parties that are in agreement on the implementation of the Fiscal Pact.

johncassarwhite@yahoo.com