Moody’s Trims Barbados Local Currency Rating On Debt Concerns
Tuesday June 14 2011 | 03:09 AM

Moody's Investors Service lowered its domestic currency rating on Barbados to the brink of junk, citing concerns about the island nation's ability to absorb high levels of government debt issuance as the already large deficit is expected to rise.

The country's rating was downgraded by one notch to Baa3, the lowest investment-grade level. The rating outlook on both the domestic and foreign currency ratings has been revised to negative, meaning both ratings could face a downgrade.

Moody's said the downgrade considers the agency's view that the primary credit strength that historically has enabled Barbados to achieve a higher rating than the country's foreign currency obligations, namely the existence of a large captive market for domestic currency government paper, has eroded.

Meanwhile, Moody's said the government's desire to defend Barbados's currency in the face of potentially increasing pressure on the fixed exchange rate could reduce the country's flexibility to try to avoid a default on the domestic currency debt by printing money.

The negative outlook reflects Moody's view that the government's debt ratios are likely to deteriorate further over the next year to 18 months to levels that are no longer consistent with an investment-grade rating given the small size and limited diversification of Barbados' economy.

Limited growth prospects also make it unlikely that the country will be able to grow out of its debt burden in the near-to-medium term. Tourism is critical to the Caribbean nation, but the U.S. recession reduced business and leisure travel. That led to an increasingly pessimistic view from ratings agencies.