- Created on Wednesday, 29 July 2015 04:03
- Category: Features
The Central Bank 30 Year Bond Issue.
I have 2 questions for the individuals who say "Bond Scam, Bond Scam".
Q1: Explain to me where is the scam in the bond issue.
Q2: Who stole the money?
Now come the pundits, be reminded 145 Members and Ministers of our parliament under UPFA has not passed the A' levels, and of that 95 so called pundits who ran our country for 10 years do not have O' Levels. These are the parliamentarians crying "scam, scam, scam. Let me quote some of them.
Bandula Gunewardene: This is the Minister under UPFA who said that Rs. 2500.00 a month is enough for a family of four to live comfortably in Sri Lanka (Where did he come up with this figure??). He has said the loss in the 30 year bond issue Rs.50 billion. How did he come up with this figure, only God knows. The guy who can't calculate the stipend for a family of 4 to live in Sri Lanka, is now is talking about bonds and in billions. Even a Tri-Shaw driver will tell you how much it costs a family of 4 for a month.
Wimal Weerawansa: I don’t have to write to you about his and his wife's fraud, lies and deserting the JVP to rob the public with the UPFA. He says the loss is 30 Billion. Well these guys seem to pluck these figures from air… Airheads do it…
Nivard Cabraal: The most corrupt Governor that Central Bank ever had. This shameless human being (if you can call him one), manipulated EPF funds to fatten the purses of the stock market manipulators. While we are on the issue of bonds, this is the ignorant Governor who invested billions in Greek Bonds knowing that Greece was going bankrupt. Yesterday Greece defaulted on the interest payable to IMF on monies borrowed. What about the principal and interest owed to Sri Lanka? Because of the buffoon Nivard Cabraal we may not see the colour of it.
These are some of the public lunatics that I have quoted. The actual picture of the 30 year bond that was issued on the 27th of February, 2015. Why did this bond issue run into controversy, The one and only reason is because the bid was to be 1 billion, but the bids were raised and accepted to 10 billion. So what happens when the bids are raised? the average returns was also driven up because of the excess uptake from 1 billion to 10 billion.
It is understandable if the public outcry is for 2 reasons.
1) The high increase in the issue (10Bill), which also will give a higher interest rate. 2) The largest beneficiary of the issue was a company closely connected to the sitting Governor. Creating a conflict of interest. Sri Lanka doesn’t have any rules on who you should award an issue or for that matter any tender.
Then came the uneducated politicians, and the ignorant economist on all media, so called journalists jumped on board to calculate the loss. Unfortunately the contributions published do not take into account 3 most critical aspects required to calculate the exact loss.
1). You need to compute the value so that you are in the present. You can't add present monies to future monies, this is a "no no" when you compute time value money. So what is Computing time value money? If a person loses Rs.1000.00 today and the interest rate was 10.4%, it is the same as losing Rs.2000.00 in 7 years, or Rs.4000 in 14 years (This is called the rule of 72. If you take 72 and divide by the rate of interest, in this case 10.4, it will give you the time it takes to double the money, through compounding interest). Therefore losing Rs.1000 today and losing Rs.4000.00 in 14 years, is not the same as losing Rs. 5000.00 (1000+4000) today, but it is the same as losing 2000.00 today. The time-value of money is a basic and core principle of financial calculations, and the newspaper articles and the politicians HAVE IGNORED IT, I am sure they don’t know it. The result has been the erroneous calculations that adds up money due in 20 and 30 years with money due in the present year, without discounting FUTURE payments to the present value. THE RESULT IS INCORRECT CALCULATIONS THAT HUGELY EXAGGERATE THE LOSS.
2) Inaccurate Stipulation of the base rate: All calculations of loss are based on estimating the "extra interest" that was paid for the 30 year bond.
Various rates are used by all and sundry pundits in the media. Some of them well under 10%. Well, such speculations are not necessary as the actual bids are known. Public Debt Department (PDD) document shows that the market was not offering the low rates to the bank. If the bids were not prorated The 1 billion mark would have meant accepting 1,308 billion (including 0.5 bill from EPF) THE AVERAGE WEIGHTED REURN WOULD BE 10.465%. The leaks of the COPE report says the PDD decided to take bids up to 2,608 billion. This recommendation does not ring an alarm, because 2.358 billion of this total will come from government controlled entities - Rs. 1.5 billion from EPF and the rest from Government banks, and NONE from Perpetual Treasuries, which has been identified as the dubious bidder where the governor has a conflict of interest. Even though the PDD recommended more than double the uptake of what was announced (which is not a good practice) it has been done before on short term issues when Nivard Cabraal was the governor. So the bottom line is that the weighted return recommended by the PDD from the 2.6 billion uptake was 10.724%. SO THIS IS THE ACTUAL BASE RATE RECOMMENDED FOR THE ISSUE BY THE PDD. Which takes all the guesswork. So far no one has used this information therefore they have not been able to set the appropriate base rate of 10.724%. The governor has absolutely no input into this. The PDD does not admit him into their meetings while discussing bids.
3) so called "LOSS" in deviating from the initial PDD recommendation… The PDD said ok to issue
2.608 billion at the rate of 10.724. If the governor had issued this amount, there would be no scam talk, also if he did not give Perpetual securities. Well what the governor did was increased the bid to 10 billion. This final 10 billion bid came at the rate of 11.727%. So the loss calculation will be between this rate and the rate for 2.608 billion. The excess interest rate paid by the increased uptake is 1% (to be exact 1.003%).
Lets calculate the loss. The present value of the loss for over 30 years, in taking 10.058 billion at this higher rate rather than the lower base rate is equal 0.9 billion (896,430,491 to be precise) THIS IS THE LOSS (if you can call it a loss, I don’t)
However it is only a fraction of the loss of 8.7 billion erroneously calculated on the 30 year bond by the ex governor the goat Nivard Cabraal. Of the 7.8 billion difference between Cabraals calculation and the actual, Rs. 5.7 billion comes from computational error and 2.1 billion from the speculated base rate.
In closing let me tell you this. The 10 billion in bonds issued are bought by the EPF and the government banks. So the difference in the rate from 10.724 to 11.727 an increase of 1 percent is also beneficial to the EPF and the banks which will get a higher rate of interest. I ask the dumb politicians who are not O'level qualified this question. If Central Bank is owned by the government, the Central Bank is the trustee for the EPF, the bank of Ceylon, Peoples Bank and the NSB is owned by the government. Who benefits by the increased rate?? So where is the loss as the money is channeled back to the government.
Talking of losses, take the Hambantota harbour, Mattala airport, Mihin Air, and all the commissions paid for the building of highways….can you even compare the loss…Oh and the US$ 10 billion which was found in Dubai…..compares nothing to the 30 year bond..
Please be kind enough to educate the rest.
Compiled and written from some information from Verite Research.
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