20 May, 2019

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Destruction Brewed By The Historic Bond Scam

By Dhanusha Pathirana

Dhanusha Pathirana

Dhanusha Pathirana

Accepting bids at a yield of 12.5% for 30 year government bonds while the market rate was nearly 300 basis points below the accepted yield caused a far greater destabilizing impact on the economy as a whole which went firmly under the radar of both economic commentators and politicians who raised the issue at public forums. 

It is common knowledge that the artificially higher yield offered to Perpetual Capital (pvt) ltd by the Central Bank of Sri Lanka effectively reduced the market value of the paper claims of the already existing bond holders by approximately 25% – 30%, temporarily, until the market readjusted itself to reflect reality which it generally believes in. It was a case where the general interest of the capitalist class was sacrificed to entertain that of a particular by the state. Nevertheless, this temporary reduction of market value of the entire government bond market in Sri Lanka is causing a far greater destructive effect that’s long lasting on country’s external stability and ultimately its level of foreign indebtedness as a whole. This is so given that the sense of instability triggered within market forces following the fraudulent bond deal caused the foreign holders of Sri Lankan government bonds to withdraw its bond investments out of the country at an alarming rate.

The Central Bank Governor - Arjuna Mahendran

The Central Bank Governor – Arjuna Mahendran

At the start of the year foreign ownership of government bonds was LKR 457 billion amounting to 11.4% of the total stock. The figure remained almost unchanged at LKR 456 billion that was 11.1% of the total till 18th February 2015. However, following the historic bond deal, the figure now stands at LKR 408 billion, indicating a foreign outflow of nearly LKR 50 billion and a reduction of the foreign holdings of government bonds by as much as 11% since March 2015.  The bond deal in its turn triggered a flight of foreign capital from Sri Lanka’s government bond market that is of an economically lethal magnitude. The tormenting effect of a foreign outflow of this scale on external stability of country’s economy is indisputable and furthermore is economically long lasting.

The out flow directly depletes the foreign reserves of the country crippling the already unstable external balance of the economy. It causes the rate of exchange to depreciate and domestic interest rates to rise and as a result, compels monetary authorities to borrow even more from foreign sources to counteract these destructive forces let loose by the bond deal. The recent currency swaps made with Indian Central Bank and borrowing over USD two billion through international sovereign bonds by Sri Lanka’s Central Bank were partly instigated by the foreign out flow which gathered pace as a result of the historic bond scam. As it is now apparent the process escalates the all ready humongous foreign indebtedness of Sri Lanka and depletes her foreign reserves throwing the country further down the path of insolvency. It is absolutely fascinating that such an outcome was brought about together with the involved business interest, by the Central Bank of Sri Lanka at a time where country’s exports receipts are depleting and the deficit in the trade account is growing large enough to swallow up the value of domestic wages to the point of extinction.

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Latest comments

  • 12
    1

    However much the PM tries to “defend” himself and the Governor of CB; the fact remains that there “WAS” a “behind the scenes” “DEAL” that went through this “Bond Issue”. Just imagine how many “Inquiries” were carried out on this issue. The court case, as I said earlier was a “big time” bungle and those sought redress from courts did not know what they should be doing. That ended in a clownish manner. This was a big blow to the “yahapalanay” and it all happened within the “100 Day” promised programme. We know what the President had to say about it. He said in his statement to the country : “I advised the PM to request the Governor of CB to tender resignation and settle this issue”. The irony of this was that the PM did not “listen” to that advice.

    Leaving aside all above, some interesting revelations came to light in a programme called “SATANA” aired over Sirasa yesterday. The representative from the UNP, Dr. Rajith Senaratne was questioned on this issue. He said: “I originally objected to the appointment of Mr. Mahendran and advised the PM not to bring him to hold this post and because of that, he did not want to serve on the COPE committee” He also said that the PM does not want to remove him from this position. Also in the same programme, the JVP representative, DR. Jayatissa stated that Mr. Mahndran’s nephew obtained Rs 100 million from Bank of Ceylon to bid for the “Bond Issue”. He very correctly asked: “If Government wanted money, why they could not obtain it direct from the Bank of Ceylon which is a Government Bank. So we see here some thing that is not being told to us and also the whole “Bond Issue” was not “TRANSPARENT”. I believe, PM knows it; the President knows it; the Senior Members of the Cabinet know it; the PEOPLE know it.

  • 12
    2

    The Prime Minister , Governor and high officials are a total disgrace for allowing the bond sale to conclude in such a manner and its continued existence is an indication that there is a big problem with the Central Bank and its fiscal management and has rendered them untrustworthy. Further this has opened fisures for other raiders to wait for the opportunity to pounce on our country and loot it. The muck started with the appointment of outsiders who were hardly experience or qualified to hold such a post. Once again politics has been the root of all evil.

  • 5
    2

    Breath of Fresh air at last on CT.

  • 11
    2

    LKR 22.5 Million every month is the Commission Aloysious Family and Partners of Perpetual are collecting right now, from the extra 3 percent which the Father in Law granted them. over and above the market rate.

    That is an income stream of 270 Million LKR per year for the next 30 years… Folks..

    To put it in perspective, LKR 12 Million will buy a nice 2 Bedroom and 2 Bathroom apartment .

    This is in a new Block on the Seaside next to the Marine Drive in Wellala Gardens.

    Aloysious family can buy 2 of these units every month with this new income alone.

    That is 24 Apartments in Wellala Gardens each year. if they go for Real Estate,

    They can accumulate 720 Apartments by the time the Bonds mature in the year 2045.

    Still the Central Bank of Srilanka will have to hand back a cheques for 9 Billion LKR as the loan payment.

    The beauty is Aloysious Perpetuals will have 30, six Storey apartment Blocks along Marine Drive , plus the LKR 9 Billion cheque.

    Just imagine how much even one Apartment would be worth in year 2045 .

    Good Luck to them.

    But how Ranil arranged Mahendran and the SIL to rip off the Tax Payers to the tune of 22.5 Million LKR a month is nothing but a despicable act .

    The fact that even the children and perhaps even the grand children of the current Tax Payers have to shoulder the burden of making contributions to Aloysious Mahendran Family trust is even more abhorrent.

    And Batalanda Ranil coming out to white wash Mahendran when he is not even a citizen of our land , and trying desperately to use the Courts of the land to muzzle the patriotic people who are trying to expose this outright robbery, is really pathetic.

    Considering the fact that the supporters of this Political Leader of the Elite think his Poo even smells like Roses.

  • 6
    15

    Last para throws humongous (his own words) amount of accusation at current government conveniently forgetting who was ruling and ruining the country for the past 10 years. Another Baiya throwing his 2 cents at an audience where majority is Toiyo. Only issue they can even remotely deceive the masses is Bond Issue, so they bark at top of their voice.

    Only selected few in Sri Lanka that to exclusively MARA clan complain about the Bond Issue of present government. Not single article has been written in the international business circle about any wrong doing.

    • 10
      1

      Afzal, looks like you are missing the point!

      It’s not to do with the past 10 years, as we are all aware of the “ruining of the country” during that time. The point is that Ranil has created a massive impediment to Maithri’s Yahapalanaya with his most illogical defense of Mahendran.

      Any intelligent and impartial leader would have demanded Mahendran step down, at least until his actions were investigated.

      What Ranil has succeeded in doing is give the opposition the only thing they have to beat to death as reasons why Ranil (and by extension the Party) can not be trusted and that he/they are “corrupt” as well.

      • 0
        1

        [Edited out]

  • 3
    3

    Converting a 1 Billion dollar bond issue into a 10 Billion dollar bond issue will create ripples in the bond market. These ripples will affect the Countries currency reserves. Interest rates are also driven up but NON of this is ILLEGAL. This is what had to be done in the political context regardless of the long term damage. If MR did this no one would even know it happened. Some economist would have flagged it but the public would loose interest and move on.

    • 1
      1

      You better get to know what legal and illegal means.

  • 8
    2

    RANIL IS THE RICHARD NIXON OF SRI LANKA

    Most of us who are familiar with the Watergate scandal that forced US President Richard Nixon to resign in disgrace, and are also familiar with the emerging details of the largest bond fraud in Sri Lankan history, see the parallels fairly clearly and wonder whether the current Prime Minister of Sri Lanka, Ranil Wickramasinghe, will fall from grace in like fashion.

    Richard Nixon, as you might recall, denied any involvement with Watergate right up until moment that the tapes were leaked to the press that proved his involvement with the cover-up of the burglary at the Democratic National Headquarters by Republican Party operatives. A few months after the break-in, Nixon claimed his presidential lawyer, John Dean, had conducted a thorough investigation (which was later shown to be a complete fabrication), and stated based on this investigation, “I can say categorically that… no one in the White House staff, no one in this Administration, presently employed, was involved in this very bizarre incident.”(1) Nixon was also famous for saying, “I will never tell a lie”, when all who knew him revealed that he constantly lied as part of a pathology and defect in his personality and character.

    The parallels to Watergate and the Central Bank Fraud are very close. Ranil Wickramasinghe had a phony ‘independent’ committee of UNP party loyalists do an investigation which found that Arjuna Mahendran had “no direct involvement” as the Central Bank Governor in the issuance of bonds to his son-in-law’s securities firm, Perpetual Treasuries.

    However, the COPE report (2) which was in an interim draft form when it was leaked to the press, tells a completely different story than the ‘no direct involvement conclusion” by Ranil’s independent committee. The COPE report consisted of recorded testimony from 49 witnesses, and two of these witnesses – Dr. Azim and Mrs. Seneviratne – who were superintendents in the department where the bond auction was taking place – claimed that the Central Bank Governor came into their department on two occasions: once, during the course of the auction and remained there until the auction was finished, and on the second occasion after the auction had been completed he returned with two deputy ministers from the Central Bank, demanded to see the bidding list, and after reviewing the bidding list directed Azim and Seneviratne, over their objections, to accept bids to the exact amount of his son-in-law’s bid. Azim and Seneviratne also testified that in their entire careers at the Central Bank, no Central Bank Governor other than Mahendran had ever come into their department before during an auction, and never had told them which bids or amounts they should accept or not.

    When Mahendran was questioned about his personal involvement and presence during the bond auction and issuance of the bonds to his son-in-law’s firm before COPE committee investigators, he claimed he was there at the auction on “strong directives” from Prime Minister Ranil Wickramasinghe.(3)

    Now we know we know why Ranil Wickramasinghe has been trying to prevent the COPE report from being disclosed to the public – it implicates ‘him’ in securities fraud, insider trading, and obstruction of justice, which are all serious crimes that carry stiff prison sentences. Ranil knows the voters of Sri Lanka would never take him or his UNP party seriously on their claim to bring ‘good governance’ to Sri Lanka knowing he was involved in such major crimes while being in control of the Sri Lankan government for only six months.

    Nixon resigned in disgrace rather than face an impeachment trial which certainly would have found him guilty of serious crime, now we will see if Ranil will do the same or bring down the entire UNP party with him by continuing to contest this election.

    References:

    (1) “Watergate Retrospective: The Decline and Fall”, Time Magazine, August 19, 1974.

    (2) COPE Interim Draft Report of Bond Fraud (Page 8): https://www.colombotelegraph.com/index.php/bond-scam-full-text-of-interim-report-of-cope-inquiry/

    (3) “Stinking details on Bond scam COPE report reveals”, Ceylon Today, July 5, 2015.

    • 0
      0

      You are insulting Richard Nixon, I’m afraid.

  • 13
    2

    No body can defend this fraud. By getting people like Harsha, Sujeeva and Eran to defend this fraud Ranil has ruined their future too. The accusation of white washing a fraud on the nation will be thrown at these three men for the rest of their public life. Singha Ratnatunga an experienced journalist and Ranjith Wijewardena a wise businessman who control the usually pro UNP,are playing safe because they can see the fraud here.But these young MPs have sacrificed their careers now. Learn what Ranil is all about.

  • 1
    0

    It is up to the educated voter to decide which rotten apples they leave out on the 17th .

  • 8
    0

    This issue and this issue alone should be enough for people to boot out the UNP or the UNF they are now called from power on 17th August. People who commit this type of fraud hiding behind the veil of ‘good governance’ are the most dangerous and should never be in power.Simply Ranil is not to be trusted.

  • 1
    4

    all of you seem to think that ranil has swept something under the arpet on the bond issue. why dont you give logi a hne. will ranil who is a sesoned politiian tke a chance, at this time when he on the brink of victory,by supporting an alleged crook. no sir all of you are racists sinhalese who do not want a tamil as the head of the central bank. that is the raw truth.

  • 1
    0

    The fact that the government was able to sell Rs 40 billion in 4 year bonds at a mere 7% pa stands in sharp contrast to what happened at the 30 year heist carried out by the Governor of the Central Bank, when it is well known that shorter term bonds have to carry a higher interest rate than long term bonds.

    The poor villager was fleeced with government connivance.

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