Govt. Bonds, what the people should know 

2018-01-30

The Sri Lankan Local Government elections are getting closer and the hot topic for many participating major political parties is the “Irregularities that had taken place at the Central Bank when auctioning Government Bonds”. Almost every Sri Lankan is talking about the alleged Bond fraud. The Opposition has deployed a strategy to pin the responsibility of the alleged fraud on the Prime Minister Ranil Wickremesinghe because he had appointed the Central Bank’s former Governor Arjun Mahendran who is at the centre of the entire scandal. It looks like the Bond Fraud when the parties opposing the UNP and Prime Minister Wickremesinghe call it, is likely to make a tangible change to the outcome at the local government elections in February unless the proper and truthful information is passed on to the public. 

A government bond is a debt instrument issued by a government to support government spending. In layman’s terms Government Bond is money that the Government borrows to make ends meet when there is insufficient Government income. In every country these bonds are issued by their respective Central Banks which are the Government’s Bankers. Needless to say as any other government function issuing the Bonds have very clear set of guidelines for the issuing authority to follow.

The problem that is going on now is because the Central Bank under the governorship of Mr. Mahendran had not followed the rules and regulations which they should have followed when they were auctioning the Bonds.

It is alleged that the Central Bank by not following these rules a primary market bond dealer, who is well connected to politicians of all major parties made a colossal profit at the expense of the people of Sri Lanka. A comprehensive report of Central Bank’s misconduct is on its way and rightfully whoever is responsible for these irregularities should be punished appropriately.   

The Government should not only investigate the misconduct of former governor Arjun Mahendran during his tenure in office but also investigate the previous CB governor Nivard Cabraal

In my view the Government should not only investigate the misconduct of former governor Arjun Mahendran during his tenure in office but also investigate the previous CB governor Nivard Cabraal whose blunders resulted in losses of billions of rupees to the country. The CPC Crude Oil Hedging deal which incurred losses of more than 14 billion rupees and counting because of utter negligence, ignorance and corruption. I was instrumental in getting down two well experienced industry specialists from the Chicago Mercantile Exchange who strongly advised the Central Bank and the Petroleum Corporation against the strategy they wanted to use to Hedge the Country’s Crude Oil exposure pointing out that a sudden drop in fuel prices could result in the Sri Lankan Government falling in to a massive “margin call” in their Hedging account. Neither the Central Bank nor the CPC was interested in the advice given to them by these specialists. In the same way having realised the impending loss for the Sri Lankan Government, the Chicago based Futures Commission Merchant who was among 20 of the largest brokerage firms in the world at that time backed out from CPC hedging deal. The Central Bank was ignorant about how this kind of trading functioned but it wanted to show that it had it under control. The deputy governor who was in charge of the hedging deal on Crude Oil had read a book on Hedging which he had on his desk and the devastating strategy they wanted to apply to the deal was one chapter of that book. It resulted in a loss of up to 14 billion so far.   

Some people made commissions out of this and there is no doubt on that

Newport Beach California-based Pimco is or used to be the largest bond-fund manager in the world, with nearly US$2 trillion in assets under management. Mohamed Aly El-Erian was the CEO of Pimco during the Greek Debt crisis and he was featured on all Business and regular news channels during that period for in-depth analysis on Greek Bonds. Mr. El-Erian is one of the most specialised and successful bond traders in the world. His success has elevated him to a point that the Trump administration is now considering him for the Vice Chair of the Federal Reserve Bank. At that time El-Erian and the rest of the experts on Bonds were trying to come up with only exit strategies if you have already had Greek Bonds in your portfolio which was extremely difficult at the time hence the issuing country of the Bond was considering to default. No one was thinking of buying Greek Bonds but Sri Lanka’s Central Bank. I am sure that they did not infringe any of guidelines laid down by the government for the Central Bankers to engage in such trade but if they were just watching CNBC or Bloomberg news and listening to Mr. El-Erian they might have refrained from making that investment. Later in the same year the Sri Lankan Central Bank unloaded the Greek Bonds at a loss of more than US$ 6 million. The Central Bank argued that although they lost US$6 million on the Greek Bond trade they still ended up with a profit on the Investment they made in 2011. The profit is made by taking a risk with our national assets. When you have a positive balance on trading there is no need to take a high risk trade like Greek Bonds against all odds. The Central Bank is not a proprietary trading account where market players take undue risk to make a killing. If you made good profits a Central Bank of a poor country like Sri Lanka should think of being more conservative and protect what we have. This entire deal has another side. Some people made commissions out of this and there is no doubt on that. Brokering Banks very commonly engage in such activity and prior to Greece when Argentinian Bonds were aggressively sold before defaulting took place the situation was the same. Very respectable Banks offered massive commissions to whomsoever brokered a sale.   

 The Central Bank argued that although they lost US$6 million on the Greek Bond trade they still ended up with a profit on the Investment they made in 2011. The profit is made by taking a risk with our national assets.

In most cases the people do not understand the functions and the technicalities of something like the Bond Market. Nevertheless who are attacking the UNP are very vocal about the Bond Issue so as to gain a political advantage at the forthcoming Local Government elections. There is one more important goal that these UNP bashers are trying to achieve. That is to accuse Prime Minister Ranil Wickremesinghe was a part of a financial irregularity. That is one thing that no one in the universe could accuse him of. The Prime Minister will never misappropriate public money. He does not need it. This allegations are made with a plan to destroy his record of being clean and to dampen his chances of being successful at the presidential election in the future. It is not too late for the UNP to embark on a strong campaign to counter the false allegations made against its leader and the party and most importantly to educate the common man with the simple truth.