Bermuda has not reached levels of public debt that would cause the UK alarm, Governor Sir Richard Gozney said yesterday.

His comments came after The Foreign and Commonwealth Office refused the Cayman Islands Government permission to borrow more money until it comes up with a sustainable long-term plan to cut its debt.

The Caribbean British Overseas Territory's (BOT) debt has escalated so rapidly over the past year, that last week it had to delay some pension, health insurance and contractors' payments in order to pay its civil servants' salaries.

Cayman has negotiated a $372 million loan with local banks to see it through to the middle of next year. But it cannot borrow that money without UK permission.

Unlike fellow BOT Bermuda, Cayman needs UK approval to borrow more money because it breached its own fiscal laws by running up an operating deficit for the 2008/09 financial year.

Bermuda also ran a deficit on its current account in the past financial year, of some $6.3 million, and borrowing is budgeted to soar to $682 million in the current financial year. A law was passed this year to raise the Government's statutory borrowing limit.

Finance Minister Paula Cox was yesterday unavailable to comment on the Caymans situation and the likelihood of anything similar happening in Bermuda.

Sir Richard told The Royal Gazette that "the public indebtedness of almost every country in the world is of natural interest at present, both to the media and to all of those with responsibility for keeping governments afloat or for warning them not to sink".

He added: "For the British Government we in Government House naturally watch the situation of the Bermuda Government's budget, and the subsequent revenue and expenditure, and the public indebtedness which results from the balance between the two.

"While public indebtedness has risen it has not, I think, risen to alarming levels, although I acknowledge that some local observers have been challenging that assumption. At least as important, Bermuda has a statutory limit on public indebtedness which has not been breached.

"As a result, there has so far been no reason for the British Government to press Bermuda to expand its revenue base.

"Naturally, as and when Bermuda is able to diversify its economy, with increased revenue and employment as a consequence, I shall be amongst those shouting encouragement."

He declined to comment specifically on the case of the Caymans.

FCO Parliamentary Under Secretary of State Chris Bryant said in a letter to the Cayman Leader of Government Business McKeeva Bush that he was "alarmed" at the Cayman's deficit in the 2008/09 financial year, particularly as it followed a year of healthy surplus.

He added that the UK wanted to see a "clear strategy for cutting borrowing and debt over the next three to five years and tackling expenditure".

The Caymans relies heavily on its financial services industry, particularly its huge funds, trusts and banking industries, which last year took a major hit from the global financial crisis.

Cayman imposes no direct taxes — but Mr. Bryant suggested that would probably now have to change.

"It would be unwise, I suspect, to rely too heavily on a rapid improvement in trust fund income or to expect that the Cayman Islands' prosperity can presume on an offshore tax haven status," Mr. Bryant wrote.

"To make public finances more resilient in the face of these uncertainties and to give me confidence that you will be able to service any new borrowing you will have to widen the tax base. I fear you will have no choice but to consider new taxes — perhaps payroll and property taxes, such as those in BVI (the British Virgin Islands)."

Speaking at an emergency meeting last week of 300 people last week, Mr. Bush was quoted by Cayman Net News as saying: "Things will need to change. I know that may sound obvious, but we must realise that we cannot continue as if everything is normal when faced with these unprecedented challenges.

"We must accept that our way of doing things and our own environment will have to change and it will have to change very quickly.

"We cannot continue to have everything without giving up something," he said, warning against traditional resentments of foreigners and outside investment. "Who is hurt and can't meet their obligations or pay school fees? A lot of us are suffering because business has been chased away. Can we afford what we are doing? We have a system that is making investors feel unwelcome."

Cayman expects to face a cash shortfall of $44.1 million by the end of this month.