Standard & Poor downgraded Malta’s rating to BBB+ in January 2013. The rating had already slipped from AA in December 2011 to A- in January 2012. This was mainly due to two factors. The first is the increasing interest burden as a percentage of revenue from 7.6% in 2010 to 8.4% in the first six months of 2012. The second factor is the high level of overall debt (debt plus guarantees) as a percentage of GDP standing at 89% at end 2011 and marginally more in 2012. The actual debt plus guarantees increased by €427m from €5,242m in December 2010 to €5,669m in December 2011 and further increased by €318m between December 2011 and €5,987m in September 2012.

The improvement in the Maltese debt to GDP ratio from Q2 2012 (75.6%)  to Q3 2012 (73.1%) of 2.5% should not make us feel too comfortable as overall debt continues to increase and precisely by €745m between December 2010 and September 2012 and projected to increase by another €600m to December 2015.

It is evident that government has been over-spending and borrowing in order to balance the books. Although this is happening at an accelerated rate it appears to have escaped the attention of all at the Ministry of Finance. The slippage in the country’s rating should have been a warning light even to the uninitiated. The fact that the country’s financial situation has been allowed to deteriorate to this extent does not reflect well on the competence of the persons responsible in government. All this while the public was and is being told that there are no problems and that the country’s finances are on a sound footing. This is a highly regrettable state of affairs and I make these statements with a heavy heart. The government is in denial. In the meantime, however, Malta must move on and deal with this imminent and real danger.

It gets worse. S&P gave Malta a bleak warning: “Given its high government debt, Malta possesses a limited space to counter a prolonged period of lower growth.”

This statement has two major implications. The first is that we can expect, at best, low GDP growth in years to come while our debt increases. This will rapidly push the overall debt to GDP ratio to over 100%. The second issue is that, having ignored all the alarm bells, we have all but lost the possibility to manoeuvre our way out of this predicament. It would be a grave mistake to gain comfort from the fact that the governments of other countries have also lost control of their countries’ finances and have a huge debt on their hands.

It would be equally misguided to believe that it is fine for the Maltese government to run on deficits financed by a huge debt as long as the local banks continue to provide funds to the country by purchasing treasury bonds. The latter is so for a simple enough reason. As the government debt and interest burden grow, GDP growth is slow or negative, Malta’s ratings drop further and the economy stagnates, there will come a point where the banks’ balance sheets will have to face the problem of non performing property loans and grave concern over toxic government debt.

Government would need to go to the EU to request funds to save the banks to the tune of billions of euros in order to protect depositors’ money and the bailout funds that Malta would, as a result, need from the EU would be a multiple of our GDP. This is the Cypriot and Irish scenario. The domino effect would be ruthless and irreversible.

We urgently need to acknowledge that there is a problem and immediately start to manage it. The consequence of not doing this is that the country seriously risks becoming insolvent in a foreseeable future and be forced into a humiliating beggar’s role with the EU. This would see direct management of our economy and parliament by the IMF, European Central Bank and the EU Commission. Our elected representatives would be rendered impotent as all decisions would need to be approved by Brussels with an ensuing dramatic loss of our democratic rights and civil liberties. The EU would force us to raise taxes and make severe cost cuts and an entire generation of Maltese would be robbed of their chance to live a life of opportunity and prosperity. May I remind the readers that we are here talking about our children and grandchildren.

I should also point out that this very same scenario is playing out in Cyprus at this time. Cyprus is bankrupt and has officially requested a bailout from the EU. The EU has forced Cyprus to reduce or eliminate altogether child, mother and student subsidies and increase the VAT rate, social security and pension contributions, and duty on fuel, alcohol and tobacco, among a whole array of other austerity and fiscal measures. The EU is insisting that Cyprus increase its 10% company tax as a condition for paying the bailout funds. The 10% company tax is one of the pillars on which the financial services industry in Cyprus is built. It does not take a genius to see how negatively such a scenario would play out in Malta.

Greece, Ireland, Portugal and Cyprus have already requested assistance from the EU as they succumbed under the sheer weight of their national debt. Spain, Italy and France are next in line and on the “too large to fail” list. Much has been written about these latter countries in the financial press and the question is “when” rather than “if”. Let us not be stupid about this. There is nothing under the sky that is too large to go bust, it just causes more damage.

So, ‘quo vadis’ Malta?

S&P have not factored one important variable into their equation. This is the fact that we are islanders and in tough times we stick together and fight back as one, no matter what the odds are. In so doing we become an indomitable force. Can we still get out of this tight spot? The answer is a determined yes and this is particularly so as we still have a window of opportunity that is however rapidly narrowing.

There has to be a change in the way this country is being managed and this is possible. To start off with, Malta’s interest must come first in all decisions taken by the new government. The europhiles must to give way to the patriots.

There needs to be a substantial reduction in the cost of government. There needs to be greater tax compliance from taxpayers. The cost of borrowing must decrease. The new government needs to reduce company and personal taxes even further in order stimulate consumption, investment, jobs and growth. Importantly, it is my conviction that this would also increase the tax revenues. It is a medium to long-term plan that would probably run for around 10 years and in the short to medium-term lead from annual deficits to surpluses and eventually to a reduction in overall debt.

David Marinelli is CEO of Portman International – the Financial Services Group