It can't pay government employees, contractors, or suppliers. Its not unusual for teachers to go six months between paychecks under Porfirio Lobo Sosa. Road construction has stopped again due to government debts to the construction companies. It stopped paying the IHSS, the government health provider, the fees it collected from government employees to pay for their health care, prompting IHSS to threaten to cut off government employees.
So what does a bankrupt government do?
Honduras is now seeking to privately place over $750 million dollars in bonds. In that private placement, it is using Barclays and Deutsche Bank as its agents. These two banking firms have been hired by the government of Honduras to set up meetings with potential investors. Meetings have now been set up in London (March 4), New York (March 6), Boston (March 6) and Los Angeles (March 7).
But there's a last minute hitch. Congress, which had to vote to allow the issuance of these bonds, changed the term from 8 years to 10 years. This increases the amount the government of Honduras will have to pay out to investors by prolonging interest payments for two more years.
If that wasn't enough, both Moody's and Standard and Poor's dropped Honduras's bond rating this week because of what they called the risk of investing in a country where there the government cannot pay its existing debts. Moody's also changed their outlook from "stable" to "negative". This in turn will raise the interest rate that Honduras will have to pay on the bonds. Moody's indicated that the downgrade was caused by
a worsening in the external finances of the country's economy, reflected in an increase of the deficit which is only partially covered by foreign direct investment.The public debt in Honduras, according to Moody's, is about 35% of its gross domestic product, which is moderate.
But that is not the whole story. Because of the temporary cessation of international funding under the de facto regime that ruled in 2009 following the June coup d'etat, the country had to rely on internal credit markets, which were costlier, raising the government's debt payment burden. Debt service (principal and interest payments) was about 10% of the budget last year, up from 3% of the budget in 2008. Much of this increase is due to the debt shift from external to internal credit markets under the seven month de facto regime. Both Moody's and Standard and Poor's cited the increased costs from using internal credit markets in their downgrades.
So off to market with $750 million dollars in bonds with a newly downgraded credit rating and an extended term of payment, just a week before the private placement meetings kick off in Europe and North America. Not the kind of bargaining position anyone would like to be in.