Colombo Telegraph

Bonds; Now It’s All Greek To Me

By Mahesh Senanayake

Mahesh Senanayake

“It’s all Greek to me” is a famous English idiom which means “difficult or beyond understanding” and it has a greater degree of relevance in the current context of the national debate on the issuance of Treasury Bonds by the Central Bank of Sri Lanka of which one of the responsibilities is to, in simple language, find “money” for the government which in most cases in the form of “debts “. Treasury bond is one such tool used by the central bank for borrowing purposes which is now known to the most of the average Sri Lankan due to the topic being discussed at national level politics. However, the said topic failed to grab the public attention during the past decade except on one occasion where the story was all water under the bridge by the time the Sri Lankan citizen had had the privilege to know what had happened to the public funds as the rulers of at the time was smart enough to conceal the story and hoodwink the public who immersed in patriotism. Thus, we did not know what the bond was meant for and how the personal “bonds” of the people who ran the show marred the original script of “running the country” presented in elections manifestos which ranged from liberating the country from the clutches of terrorism and from the economic downfall and went on to promise unplugging the economy from the debt trap. Here begins the story of “It’s all Greek to me…”

The latest story related to the bonds occurred in March 2015 with the advent of the yahapalana government with an accusation hurled by the members of the joint opposition towards the government that they had used the issuance of bonds to raise funds required to pay the bills for the cost incurred at the presidential elections and to get ready for the forthcoming general elections. The critics were smart enough to write a script that could unfold a severe blow to the newly appointed rulers, so that they could discredit the new rulers without accurate facts in hand. The concocted story presented a bleak picture of how the “precious” government security known as Treasury bonds were issued giving undue advantage to a primary dealer who was connected to the government and the governor of the central bank. They started calling it a “bond scam” and gave birth to the first part of “it’s all Greek to me”

Hither, the new Governor of the Central Bank appointed by the yahapalanaya government took immediate steps to strictly follow a transparent method in issuance of bonds through a public auction system. In contrast, his predecessor adopted a system which is called private /direct placement where the transaction took place between two parties which occurred quite unnoticed with no due scrutiny. The preference for private placement by the previous rulers is evident in the number of occasions wherein the bonds were issued through private placements and auctions which stands 80 % in favor of the former mode. The auction system is believed and accepted as the most transparent mode in contrast to the private placements. Yet, some critics who were silent contributors to the corrupt Central Bank practices, attempt to create public opinion that private placement is the best practice or else not a bad practice and, go on saying that corruption is prevalent in the auction system.

Auction system is a transparent system in which equilibrium price is determined by the bids submitted through fully automated computer system within a given time frame. For example, if a bond is issued via auction system, by the end of auction CBSL announce the weighted average price and quantity accepted. Market has all the necessary information. Private placements, in contrast give space for manipulation as the parties agree price and quantity away from the market. For example, if the weighted average price of last auction is Rs. 100.00 and secondary market is Rs. 99.50, private placement can take place at Rs. 98.00, so the buyer can sell in the secondary market (offload it to state entity) at Rs. 99.50 to bag a profits of Rs. 1.50.( Now imagine, the figures are all in billions.) No information on price and quantity is revealed to the market, hence nobody can write anything on the paper in relation to private placements. It is buried under the carpet; hence the public has no clue of what has happened. Finally it is landed in the books of the government-owned entity like EPF at whatever the price the money makers would like to “resell”. For years and years the central bank happily used these corrupt practices of offering off the market rates via private placements to their favorites and thereby some officials benefitted themselves with the blessings of their patrons.

The critics came out with various arguments and accused the newly appointed Governor for aiding and abetting a scam which he could have otherwise committed very well, had he not introduced the open transparent system. This confuses me.

Likewise the numbers shown by Bandulas, DEWs, and Cabraals and Rusirupalas contradict each other and at times the same critic presents various numbers without proper justification. All those calculations seem to be based on imaginary numbers. Once an auction concludes, no one can make a judgment of what would have been the alternate price in-lieu of the quoted price, as the central bank makes decision based on available bids. Those imaginary calculations are nothing better than somebody concluding he should have bought vegetables at better prices if nobody else came to the market on that day.

On the other hand, if the previous administration was in favor of private placements, without going an extra mile to introduce a transparent and a better system, one can assume that the so-called scam would have occurred without anyone’s notice or scrutiny at that time. The point here is if the Governor wanted to indulge in malpractices he would not have opted to change the system, which was meant for such wrong doing.

The second story of the bond scam unfolds this year in march and this time is not only the joint opposition, but some of the civil groups and movements and some members of the incumbent government have joined the bandwagon to criticize the Governor, the monetary board ,the central bank and the government for malpractices. Without adopting to an accepted legal procedure their modus operandi began with a view to create a public opinion to bring discredit to the UNP leg government and thereby jolt the yahapalana coalition .

Most of these gentlemen (sorry venerable monks as well) act as if they have woken up from a deep slumber …so its all Greek to me. Writer has the justification for that.

The real bond scam in fact happened during the tenure of former governor Cabraal. Which is indeed “all greek to me”, so as to everyone else. It was Greek Government Bonds (GGB), simply Greek Bonds that let the cat out of the bag. The loss incurred through buying greek bond was greek to everyone, but was very clear to the Auditor General who calculated Rs 2.15 billion as the loss. Auditor General has not imagined anything, just calculated difference between buying and selling price. As it was Greek to the then members of the government at that time and now that of the joint opposition, no body voiced any concern or may be, they were happy about a defeated politician running the Central Bank.

Hedging issue too was Greek, as no folk understood hedging, not even then CPC chairman and the issue begged an answer whether the then Governor who consulted CPC behind the curtain had an idea or not. Apparently, it had been all Greek to him as well. Finally, the result was a massive loss of nearly Rs 7 billion to the state coffers. How many Pet Scanners could have bought with that money, any guess? Its not Greek, number is 35. Losses to EPF through corrupt share market transactions ranging from the purchase of shares of a gas company, couple of leading but loss making hotels and in finance companies were Greek to many while the experts in the trade were aware of the fiasco. Selling gold reserves of the Central Bank to a Japanese company is a another golden scam that benefitted a few and robbed the public.

Finally, What is more Greek to me more than anything else is why the joint opposition folks and some members of the present government who were in deep oblivion when the robberies were taking place during broad day light, are now crying foul? Well, its time to wake up and wear the thinking cap so that we shall see that the real issue is not about a bond scam, but it is about a political scam.

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