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Grenada default elevates risk of spilling over into other Eastern Caribbean Currency Union states – Moody’s
However, it said both of these goals are increasingly out of reach, stating that budgets are “largely inflexible, limited by high and rising interest costs and expenditure on wages and social benefits”.
Moody’s said diminishing returns to the Caribbean tourism-centered growth model, combined with depressed public sector investment in infrastructure, have resulted in a “ratcheting down of trend growth that will be difficult to reverse”.
Moreover, it said growth in the Eastern Caribbean Currency Union is “acutely vulnerable” to volatility in external demand and weather-related shocks and that it views more indirect approaches to reducing the debt burden as less feasible in the ECCU.
It said monetizing domestic currency debt through inflation is not a viable option under the current quasi-currency board arrangement, and that the Eastern Caribbean Currency Union lacks the “fiscal firepower” to finance an emergency lending facility along the lines of the European Stability Mechanism.
Moody’s also said IMF financing remains the sole source of emergency external liquidity support for the Eastern Caribbean Currency Union.
It said debt mutualization within the currency union “a potential long-term solution to the liquidity pressures facing issuers in the Euro area, is far from becoming an economic reality in the Eastern Caribbean Currency Union since all of the sovereign member states currently carry unsustainable debt loads”.
