Stockholm (NordSIP) – Hurricane season (from June to November) in the Atlantic Ocean is always difficult for Caribbean nations to weather. This summer, Hurricane Beryl took it to a new level. The hurricane wrecked such devastation on the Caribbean nation of Grenada as to cause it to trigger a “hurricane clause” included in some of its bond contracts, allowing it to postpone the payments.
Hurricane Beryl Hits Grenada
The month of July saw Grenada being battered by Hurricane Beryl, which at its peak qualified as a Category 5 hurricane and hit the island nation with winds of up to 240 km/h, destroying entire neighbourhoods and power lines. To address this damage, the UN released US$4 million from its Central Emergency Response Fund to support emergency relief work in Grenada and other affected nations in the Caribbean.
According to a recent review by the UN Development Programme (UN DP), “on average, countries in the Caribbean suffer yearly losses from storm damages equivalent to 17% of their GDP.” The same data suggests that Grenada is the second largest outlier, overshooting this value to the tune of 35 percentage points. It is not surprising to see the effect of natural disasters spillover onto debt markets.
Estimates quoted by Reuters cite Hurricane Beryl as causing damages worth approximately worth a third of the country’s GDP. Speaking from his home island of Carriacou, a little over 47km away from Grenada, UN Climate Change Executive Secretary Simon Stiell‘s video decried the devastating impacts of Hurricane Beryl and called on governments everywhere to urgently step up climate action. “Today, I’m standing in the living room of my neighbour’s house. My own grandmother’s home down the street has been totally destroyed. Initial reports are that 98% of homes and buildings have been either destroyed or severely damaged by this most recent record-breaking hurricane Beryl,” Stiell said.
Stiell decried the conditions such disaster put families “from the largest and most developed nations to the smallest and most vulnerable”, “still in debt to the bank for a home that no longer stands, as the next brutal storm, flood or wildfire approaches, fuelled by the climate crisis”.
Grenada Defers Bond Payments
According to widespread media reports, the Ministry of Finance of Grenada announced it would postpone the bond payments in a notice to the holders of one of its international bonds. The notice is reported to have said it had “elected to make a deferral claim as a result of the event”, adding the “modelled loss” to the economy from Beryl was greater than US$15 million.
“It means Grenada will not make the bond’s next scheduled payments due on November 12 and May 12 next year, which combined add up to just over $12.5 million. Instead, the money will be added on to the US$112 million bond’s subsequent lump sum “principal” payments until the end of its term in 2030,” the notice reportedly said.
The ability of Grenada to pursue this deferral of payments is facilitated by the inclusion of what is know as a “hurricane clause” in the debt restructuring process it conducted in 2015. “As part of its 2015 debt restructuring, Grenada agreed hurricane clauses with its creditors, whereby debt service on the restructured debt (mainly to 2025 private bondholders, but also to Taiwan, Province of China and the Paris Club) would be automatically re-profiled following a hurricane and in some cases other types of natural disasters,” a 2022 discussion of Grenada’s Disaster Resilience Strategy conducted by the IMF explains.
“The agreed period of a pause in debt service is up to one year, depending on the severity of the event. The key trigger is parametric and tied to a verification by an independent insurance body (CCRIF), whose payout for modelled losses had to exceed US$15 million. This clause could release funds of over 1 percent of GDP in the event of a major natural disaster (the amounts would be smaller for smaller events),” the same IMF discussion continues.
Not Grenada’s First Rodeo
Although the use of such a hurricane clause is unprecedented, Grenada’s history of financial struggle explains the origin of this clause. According to a 2017 review of debt restructuring in Grenada compiled by IMF staff, the Caribbean sovereign defaulted twice since the turn of the millennium: once in 2004 and again in 2013. The first restructuring was preceded by a period of economic growth and an inability to deal with external shocks. The second restructuring appears to have been the result of external shocks but also of the continued damage caused by the first restructuring.
Ahead of the 2004 default, Grenada’s economy had benefited from the privileged access its agricultural products had enjoyed to European markets and its appeal as a tourist destination. However, both these positive contributions to its economic performance were eroded by the loss of its privileged access to the EU and by the decrease in American tourism following the 9/11 terrorist attacks. The arrival of Hurricane Ivan in 2003, the worst natural disaster to have hit the island in a century, coalesced all these developments and catalysed them to trigger the default event. On the other hand, the 2013 crisis appears to have mainly been motivated by the economic contraction that followed on the heels of the 2007-09 subprime crisis and of the 2009-12 European sovereign debt crisis and how they interacted with the country’s economy, which was still reeling from the 2004 default.
The decision to trigger the hurricane clause to defer payments can be best understood in this historical context. In their 2023 debt sustainability analysis (DSA) of Grenada, the IMF and WB noted that “Grenada remains in public debt distress solely due to longstanding unresolved arrears to official bilateral creditors of about US$37.6 million (3.1 percent of GDP) as of end 2022.”
“The authorities continue to make efforts to resolve the remaining external arrears. These arrears are a legacy from the 2014 debt restructuring, reflecting arrears to non-Paris Club holdouts, commercial creditors, and international organizations. In October 2022, the Government of Grenada reached a repayment agreement with the State of Libya on the US$5 million in debt arrears owed. Arrears of about US$37.6 million owed to non-Paris Club official bilateral creditors including Trinidad and Tobago and Algeria remain to be regularized,” the same DSA report added.
The Impact of Climate Change
Beyond its history of debt restructurings, the consensus is that although Grenada is exposed to hurricanes with some degree of regularity, the intensity of these disasters has been worse by man-made climate change.
“It takes just one landfalling hurricane to set back years of socio-economic development. For example, Hurricane Maria in 2017 cost Dominica 800% of its Gross Domestic Product. Early warnings by the WMO community and improved disaster risk management have dramatically reduced fatalities, but Small Island Developing States in the Caribbean still suffer disproportionately,” said WMO Deputy Secretary-General Ko Barrett.
“Property insurance premiums have come under pressure from ongoing re-evaluation of climate risks by global reinsurers. This is likely to exacerbate the degree of under-insurance and increase credit risks for lenders, calling for improved supervisory data collection and analysis that can also inform quantification of contingent government obligations. Oversight of reinsurance risks in cross-jurisdictional insurance companies calls for close regional supervisory cooperation,” the IMF said on the conclusion of the its Staff 2023 Staff Visit to Grenada.
Stiell also warned of how these disasters cause “endless debt cycles of governments borrowing to rebuild, only to face another climate inflicted disaster, forced to borrow again and again to rebuild their battered infrastructure, to divert scarce resources from educating their children, providing healthcare, and developing their nations. Tragically, this upheaval of lives and livelihoods from Beryl is not unique. It is the growing cost of unchecked climate carnage, in every country on Earth.”
“Although no one wishes a hurricane on a country, it is good to see the natural disaster clauses that Grenada inserted into its bonds almost a decade ago doing exactly what they were designed to do,” Sebastian Espinosa, a debt expert at White Oak Advisory, who helped develop the clause for the Grenada bonds, told Reuters news agency.
