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Tuesday May 18th, 2021
Bonds & Forex

Sri Lanka inquiry calls for fuller probe into bond scam, debt office overhaul

COLOMBO (EconomyNext) – A three-member committee that inquired into a controversial government bonds deal where a firm connected to the Central Bank Governor’s family was the key beneficiary has recommended a full probe and an overhaul of the debt office.

But the committee had found no ‘direct role’ of Governor Arjun Mahendran in the deal, a statement from the Ministry of Policy Planning said.

Perpetual Treasuries, a primary dealer in government debt connected to Mahendran’s son-in-law was given 5.0 billion rupees of bonds by the Central Bank’s public debt department after controversially raising the offer volumes 10 times from the original one billion rupees.

Long bonds are usually sold in relatively small volumes as demand is only from long term insurance and pension funds and interest rates tending to rise with time (an upwardly sloping yield curve) as risks are increase with time.

The deal which was done at over 200 basis points above recent sales done outside the auction process, sent shockwaves through gilt markets, killed activity for almost two days and shifted the entire yield curve up, pushing up interest costs up across maturities in later debt issues.

Perpetual Treasuries submitted bids on its own account and also billions of rupees through state-run Bank of Ceylon.

"The Committee observed that the bidding pattern of Perpetual Treasuries was unusual and warranted a further investigation," the statement said.

"It noted that the Bank of Ceylon should also carry out a forensic audit and seek explanations from its Chief Dealer and others on ad-hoc decisions risking a large amount of BOC funds involved in the 30-year bond transaction."

According to leaked documents Bank of Ceylon had submitted a successful bid on behalf of Perpetual Treasuries for 3.0 billion rupees.

Sources say bids of another 10 billion rupees had also been submitted on behalf of Perpetual Treasuries.

The committee came under fire from opposition critics as an attempt by the administration to whitewash the deal and exonerate the Governor Mahendran as it was made up lawyers connected to the ruling party.

The committee did not find a "direct role" by Governor Mahendran in deciding to accept bids 10 times above the original offer at high rates, the statement said.

But it said the Public Debt Department (PDD) of the Central Bank which sells debt on behalf of the Treasury should be overhauled.

"Since the PDD is dealing with the most sensitive information of the government, the committee is of the opinion that a proper supervisory and monitoring mechanism has to be immediately implemented with regard to its activities," the committee said.

The statement did not explain in detail how the Public Debt Department, which was headed by a newly appointed chief made a decision to sell large volumes of 30-year debt on its own.

There was also no finding on how insider information passed to outsiders allowing them to make large bids to a bond auction where most dealers simply make ‘dummy bids’ of 10 percent of the volume.

Following the bond controversy, Good Governance or ‘Yahapalanaya’ credentials of the new administration had come under fire from the opposition who accused the government of defending the bond deal and protecting the perpetrators.

Though some members of the public seem to believe that the bond deal had resulted in a 10 billion rupee outright loss of state funds Perpetual Treasuries or others holding the bonds make large gains when interest rates fall, while also earning interest with every passing day.

A 50 basis point rate cut by the Central Bank this week had added a new twist to the controversy, further clouding public perceptions, observers say.

Perpetual Treasuries’s original 5.0 billion rupee portfolio with a weighted average yield of 12.3 percent could be funded at 6.7 percent in the overnight market. Now it could be funded at even lower rates.

After the rate cut 30-year bonds were quoted at 11.00/25 percent. If the bonds are sold at 11.00 the holder of a 5.0 billion rupee portfolio yielding 12.3 percent could give an instant profit of 579 million rupees.

If rates fall further to 10 percent, the portfolio could be sold at 1.1 billion rupee capital gain.

Update III

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