Make no mistake. Bonds are debt. The principal has to be paid back with interest. Bonds may be publicly traded, bought and sold on a stock exchange, or realised through a private placement deal but they are still debt. Who or what backs up that debt?

Corporate bonds are backed by the assets, credit quality, and earnings of the company. Country debt is backed by the ability of the government in power to raise money: assessments of personal and business taxes, levies, and revenue raised by local businesses working with foreign business investment.

Folks, that means us. Keep that in mind.

The principal on bonds, otherwise known as fixed income securities, has to be paid back, at some future date, whether the bonds mature in two years, five years, or ten years.

In the meantime, each year, the interest calculated on that principal loaned to us, also has to be paid. Well, you think, if this is just more debt government is taking on - why are we doing this?

I cannot comment on a particular government strategy, but there are good market reasons that are universally employed.

A bond offering is a way to raise cash without selling off pieces of the pie. Stock purchases, on the other hand, entitle the buyer-owner to a small (or large) ownership of the entity selling the shares, and a say in the management of the company.

Since it would politically and rationally unpopular to sell off parts of a country in a public offering (although it is done under the guise of other types of ownerships, leasebacks and so on), governments (the issuers) prefer to issue bonds (debt) to attract investors as creditors, rather than equity owners.

Bonds raise much needed foreign currency, offer diversification for investors outside of their normal asset allocation strategies, and allow staggered asset liability matching over revolving time periods.

A bond launch process is similar to an initial public offering for stocks, but there are some interesting differences. In an initial stock public offering, the legal and accounting teams assist with the formal process of a private company offering equity to public investors for the first time with the issuance of a prospectus.

This is the investment bible of facts regarding the company, its financials, economic market, products, and so on.

The investment bankers act as underwriters, setting a target stock price for the opening of the bid process, but capital markets, composed of eager buyers and sellers, will ultimately dictate the eventual price on the first sale date.

Underwriters are also charged with assuring a full launch by purchasing any shares remaining in the offering, thereby completing the offering of the company in collecting their full sales price.

Once the shares are offered and sold, they are then traded in the secondary market amongst thousands of buyers and sellers. The formal bond offering document is called an indenture.

This is certainly a play on words, meaning that you and I and everyone else resident long-term in Bermuda providing the financial backing for the bond offering will be indentured (financially enslaved) until the entire debt is repaid.

The bond indenture is overseen by a trustee who acts in a fiduciary capacity for the bondholders. The indenture contains covenants that state what the borrower promises to do, among them:

1. Pay principal and interest on a timely basis

2. Pay taxes and other claims when due

3. Maintain all properties used (if real estate is used as collateral to raise revenue) in a municipality, for instance

4. Assess taxes from the public in order to fulfill the recurrent obligations

5. Submit periodic and open reports to the trustee on the status of the bonds and keeping in compliance with the terms of the bond indenture

6. Restricting the bond issuer from launching another bond offering unless certain pay down limits, for instance, are met.

A bond offering (and its issuer) will go through various legal, regulatory, credit rating scrutiny, underwriting, and analyst research steps before it can be launched.

The bond underwriter, generally, an investment bank, will help bring the initiative to the pubic, set the competitive interest rate that will be paid to the purchasers and agree to underwrite the offering by purchasing the remaining debt if the entire limit is not sold.

They assist in making a secondary market for the bond product. What do investors want to see in an investment offered by a foreign government?

The list is large and explicit. Investors like comfort factors, they want:

• A politically stable, financially sophisticated, ethically transparent, open, and successful jurisdiction.

• Global conforming financial reporting.

• A strong legal environment and judiciary system.

• International regulatory standards.

• Ethics, transparency, and responsibility in political processes.

• Freedom of press, open access to information, political transparency.

• Protection of individual rights and economic stability.

• Sustainable high country credit quality ratings from global rating agencies.

The most important component of this list is access to freely available information.

Full disclosure of all relevant material information is crucial to the investment decision-making process.

Investors must have certainty and comfort (meaning lower risk of default) when investing vast sums of money.

It is worth noting that government bond default is considerably lower in open democratic societies, but so is the coupon interest rate offered.

Argentina government bonds paid great returns in the late 1990s and early 2000, around 13 percent per year. They defaulted twice, not only not paying interest due, but stopped repayment of principal.

Eventually, bond holders received 30 percent of the principal they originally invested. A key phrase to remember: high yield means high, high risk. Always ask, will I get my money back?

In summary, Bermuda bonds are being marketed to investors on a global basis as you read this article. It is hoped, according to an excellent column by Larry Burchall, to raise about $750 million in hard foreign currency, not Bermuda dollars, to pay down some currently due liability notes.

This is real debt, in addition to the more than $1 billion already on our country's balance sheet.

I disagree with Larry at this point, however. Adding in this new bond offering - our country's total debt will stand at close to $2 billion.

The interest payments due alone each year - say at 6.5 percent - is a staggering $130 million a year!

Why are these numbers higher? Because everyone is forgetting the cost of the hospital (estimated at $500 million with cost overuns) and the Causeway (estimated $150 million with cost overuns), both of which are real debt demanding real cash.

Current accounting rules allow that these debts don't have to be counted as debt, instead this debt is called off-balance sheet risk. If no one has to count these projects in as real liabilities, no one knows what is truly owed.

How does anyone get out of a never ending cycle of debt? Cutting costs and raising revenue.

Since this debt is ours, it is time to question every inflated budget item and cost overun. It is time to make every resident a rainmaker ambassador by rebuilding our reputation and experience as a premier international destination.

It is time to count - and to be counted.

Next: According to the same press report, Bermuda government bonds may be offered to local residents, too. What will this mean as an opportunity for you?

Martha Harris Myron, CPA, CFP(US) TEP(UK) JP- Bermuda is an international Certified Financial Planner practitioner in private wealth management. She specialises in independent fee-only cross border investment, tax, estate, and strategic retirement planning services for Bermuda residents with cross-border and multi-national connections, internationally mobile people and US citizens living abroad. For more information, contact martha.myron@gmail.com">martha.myron@gmail.com or 296-3528.