The biggest danger the Clico debacle poses for Barbados is that it could bring the economy down with it. With our credit rating only being saved from further slippage due to what seems to me to be a dogged determination by Standard & Poor’s to hold it up until the very last bell is rung, the last thing we need now is to have to borrow more money to bail out the investors in Clico annuities, some $300 million of which come due in 2012.
That would be virtually a given should the first of the two bleak options for the local subsidiary of the imploded insurance giant as outlined by William Layne be adopted, and that’s why the permanent secretary in the ministry of finance opts for the second, which is “judicial management.”

Mr. Layne told BBA Editor Geralyn Edward last week that under the Insurance Act, Clico would have to be wound up or put under judicial management (see page 1 of DAILY NATION of Thursday, June 3). Under the first option, as with any other winding up, a receiver is brought in to sell off the company’s assets in order to raise as much cash as possible.  “And in this market, with a lot of real estate holders, I can’t say what they would get on the dollar,” said Mr. Layne.

Since the financial damage to Clico’s investors would be unimaginable. Many of them are average Barbadians who are depending on those annuities to fund their retirement or to pass on to their heirs, not to mention all of the life insurance policyholders who would now have to look elsewhere for coverage. It is thinkable that they would be left with cents on the dollar for their investments and/or without life insurance coverage. So government would then have to go out and borrow the millions of dollars to fund the gaping hole left by the forced sell-off of Clico International Life’s assets in a weak market.

And that could be the tipping point for the Barbados S&P credit rating. I mean, if government can’t find a mere $60 million to pay a contractor as ordered by the high court, how can it find far more funds to pay off Clico’s investors and policyholders? We are only holding on by the merest sliver right now – due to the fact that the government drastically cut its day-to-day spending in the last quarter of the 2009-2010 financial year, which ended on March 31, by a quarter, much of it through cutting of subsidies and “transfers”.

Meanwhile, I would like to hear Mr. Layne explain more about how judicial management works, but basically it sounds like Clico International would be run by a government-appointed management team under the supervision of the high court. It would also give government, through the court, the power to unilaterally change the contracts under which Clico brought in all those millions in annuities which it invested “so well” that it can’t generate enough cash to repay them when they come due.

That means annuity holders could have their contracts extended for another ten or fifteen years and their interest rates slashed. Hey, what on earth made you think Clico could pay you 8 ½ percent per year in interest when the rest of the market was paying about half that much or less?

So I think Mr. Layne is absolutely right when he told Ms. Edward that “I can speak frankly and tell you that the life insurance company will have to be put under judicial management. That is the only way that you can achieve a proper restructuring.”

But it means, that in addition to all of the other loss-making but important social services which the government is trying to manage, shall we say, more judiciously, it will now have a down-and-almost-out life insurance company to deal with. The hope is that a buyer would eventually be found after major restructuring takes place.