At the recent annual meeting of the Inter-American Development Bank, Treasury Minister Fernando Herrero Acosta announced that Costa Rica is planning to issue a new round of sovereign debt. Financial media outlets Bloomberg and the Wall Street Journal reported on the story, citing a minimum figure of $500 million, although the proposed yield and maturity date are still unknown.

One thing that Fernando Herrero did comment on was that the issuance of the bonds is opportunistic. These bonds will float on the open market, and they will be priced in U.S. dollars rather than colones. According to Herrero, the time to issue debt is now because of the low interest rates currently seen in the United States and member nations of the European Union. This means that our bonds can be priced to pay a yield that is competitive, at least in comparison to sovereign debt from the United States.

The fact that the planned bonds are priced in dollars rather than colones means that not many Tico investors will be interested in them. A regular savings account or certificate of deposit in colones is sure to offer a higher yield than the planned bonds. Take, for example, current sovereign debt that is due in 2020. On March 19, the yield on those bonds was 4.9 percent, considerably lower than a regular savings account at any bank in Costa Rica.

The Perils of Debt

Comments left by readers of La Nacion on the story mentioned above were not convinced of the bond issuance as a good idea. Ticos fear that the ghosts of the sovereign debt meltdown of Greece could one day replicate here. The bonds are purportedly being issued to guarantee money supply, combat the deficit, and invest in national infrastructure. This is where some Ticos doubt that the bonds will be put to good use.

The bonds are part of an ambitious plan by President Laura Chinchilla and her cabinet to cut down the current deficit to 3.3 percent of our Gross Domestic Product (GDP), down from 5 percent. Coupled with the revenues estimated by the Fiscal Reform Plan, the bond sale could produce $1 billion in the first year.

It is important to note that our country’s sovereign credit rating is BB+, which means that investors will be taking on some risk when holding on to these bonds. Since the credit ratings of many industrialized nations have taken a tumble in post-recessionary times, bond traders are looking for the next big thing.

Should Costa Rica become a darling of the sovereign debt markets, it would help to keep in mind that two Prime Ministers of democratic nations in Europe were essentially forced out of office by bond traders last year.