Finance Minister and the Central Bank Treasury bond scam: A query to T. Rusiripala

I read with interest the very argumentative article by T. Rusiripala (16 June) on the bond issue of 27 February 2015, which has now become a controversial subject argued among politicians, bankers and financial professionals. 

Whilst some of the points raised by Rusiripala, a veteran banker, trade unionist and one time Chairman of Bank of Ceylon, are valid, certain underlying facts or arguments appear to be conjecture, bordering at times on speculation. Therefore, for the benefit of the readers of this article, especially followers of the money market operations and trends therein, it is only reasonable that he explains or elaborate his arguments with facts.

His first contention is that the bonds put up for sale by public auction would have fetched a price of Rs. 131 for Rs. 100 bond at 9.5% indicative coupon rate. He goes on to say that even at 12.5%, the price would have been Rs. 121 per Rs. 100 bond, stating that the Central Bank, thereby the Treasury was to earn either Rs. 31 or Rs. 21.

Rusiripala argues that the bonds were sold at prices ranging from Rs. 87 to Rs. 97, to a particular primary dealer who became the centre of the storm that followed. The bid prices or the prevailing bond prices are determined by the demands of the market, influenced mainly by perceptions of the money market stake holders. One cannot rule out the impact of speculation too in this regard.

According to what I gather, the Public Debt Department (PDD) of the Central Bank after processing the bids received for the auction refers the bids that will cater to the fund requirement decided by the Domestic Debt Management Committee of the PDD at that particular time to the Tender Committee. The only details that are evaluated by the tender committee, sources say, are the values of the bids with the attendant yield rates and as a practice, details of the bidders are not submitted to the tender committee. 

The Tender Committee, it is understood, selects the bids which meet the needs without any details of the primary dealers, purely on values of bids and projected yields or weighted average rates, etc. The selected bids are finally approved by the Governor and directives if any are given only on the basis of impact on domestic interest rates and or the money market.

The intimation of selected bids are given only to the successful primary dealers and the results of the auction are published with details of prices etc., subsequently but not indicating any names of successful bidders. So when Rusiripala says that the Finance Minister lost Rs. 31 or Rs. 21 on a Rs. 100 bond, he needs to explain how these figures were arrived at.

At the time of the auction of these 30-year bonds, the bid in question was placed according to reports, by Bank of Ceylon. Any deal BOC had with Perpetual Treasuries was not known to the tender committee of the PDD. There apparently is no need for a primary dealer, in this case BOC, to indicate that these bonds are for another primary dealer, Perpetual Treasuries. So critics to insinuate that the Central Bank allowed this bid to go through because of an alleged connection Perpetual Treasuries had to a higher up in the Central Bank does not hold water.

Rusiripala speculates, quoting the ‘Lawyers’ report,’ that the Government’s Fund requirement was known to the Perpetual Treasuries and enabled them to place a large volume of bids, indirectly implying this primary dealer’s connection to a higher up. Again, if such information was in fact available to the said primary dealer, the source of information does not necessarily need to be the target of criticism at present but there could be other sources in the Central Bank like Rusiripala speculates unless he is privy to some exclusive internal information. However, this type of insinuation undermines the integrity and rectitude of the Central Bank officials and is unfair and tends to demoralise them unless substantiated by facts.

Let us assume that the bonds were sold to a primary dealer at Rs. 131 for a Rs. 100 bond; obviously the primary dealer does not buy them to hold till maturity and would have to sell to an institution that has a long-term need to hold assets of this nature. It is incredible that such an institution will pay a price above Rs. 131. So this appears to be mere speculation unless he has some additional facts or information on this score. The prices quoted, ranging from Rs. 87 to Rs. 97 allegedly quoted by BOC if it did get the bonds at that price for Perpetual Treasuries during the extended tender closure time, also needs clarification since prices are not published to all others and also how this was known to him.

Now the said bonds are with a declared coupon rate with indicative rates to attract possible bids from primary dealers. However, the Central Bank I expect will act prudently not to allow wild speculative high priced bids with possible impact on the interest rates. High interest rates as everyone knows are attractive for fund managers and to people who want to derive interest for their lifetime savings or earnings but not for entrepreneurs engaged in trade and industries.

The Central Bank’s function is to allow reasonable and balanced interest rates to evolve. The high or low prices on bonds will not affect the central bank directly since the yield on bonds is anyway payable through the announced coupon rates but it will have an impact on the debt to GDP ratio. The question is how the Public Debt Department pays the face value on maturity if it did receive a low price. Obviously, the Central Bank will be careful in this respect and have strategies to meet such situations.

The previous cope investigation into this concerned bond issue did not determine that there was any colossal loss but only an ‘opportunity cost’ (draft COPE report on the findings of the Sub Committee dated 25 June 2015). Except for observations on certain decisions of the Governor which were termed unusual, there were no findings that the Governor has misused his authority or given any irregular directives.

Let us therefore await the findings of the current COPE investigation into the bond issue of 27 February 2015.

T. Mallawatantri