Tuesday, April 28, 2015

LKR 10 Billion Development Bonds Issued at around 4%

Sri Lanka Development Bonds (SLDBs) for LKR 10 billion (USD 81,25 million) were issued at approx 4% at the moment.

Why did did Arjunan Mahendran issue 10 billion at 11.75% if there is a huge demand for Bonds even at around 4%.

The current issue of bonds were
  • 2 year Bonds: USD 30.00 million at 6 month Libor +3.6%
  • 3 year Bonds: USD 51.25 million  at 6 month Libor +3.8%
Current 6 month Libor rate is 0.41% and will change daily.
See here for current and historical LIBOR rates


Sunday, April 26, 2015

Basil Rajapakse remanded: Stealing billions and stashing them in Dubai banks

So Basil Rajapakse has been remanded. Stealing billions and stashing them in Dubai banks. Not quite.

He has been charged with

a) Providing LKR 2,500/per family for repairing houses of 1.4 million Samurdhi  families .
b) Paying Compensation of 1,700/person to 1,067 Samurdhi Officers for voluntary retirement.
c) Spending 23 million on Printing Samurdhi Diaries (*).

(*) Note Samurdhi Diaries were also printed in 2004 with photos of then Prime Minister Ranil Wickremesinghe.

Really, what a joke.  I was expecting to see at least a couple of million transferred to some bank account. Or at least a Lamborghini or Ferrari.

In contrast Arjunan Mahendran who will cost Sri Lanka a minimum LKR 12.5 billion in interestpayments has been found to have done no wrong. 

Arjunan Mahendran and Central Bank Loss Costs LKR 12.5 Billion

The whole Arjuna Mahendran Central Bank Fiasco explained very simply.
At end some explanation of the Greek Bond "losses" that Harsha de Silva was talking about.

Bottom line one is a minimum of LKR 12.5 billion lost to the country.
Bottom Line two, no law has been broken. The beauty of high finance white collar crime.

Update: Apparently the losses are on  many bond and T-Bill issues (see note below).   The estimate is a whopping LKR 42.5 billion loss by T-Bills and T-Bonds over 5 weeks.   This post looked at just one deal.

The Numbers:
  1. 1 billion was needed to roll over expiring bonds.
  2. Expected Interest Rate was 9.5%
  3. Instead 10 billion was accepted at Interest Rate of 11.75% for 30 years.
  4. Expected Interest Rate in 5 years 6.75%
    (As of 2015/4/26 Bond Yields Thai 2.5% and Vietnam 6.37% and Greek 12.7% )
In a country where economy is growing or is stable, it is expected that interest rates for borrowing will keep dropping. Specially in a world where negative interest rates are in play.

Any one with basic financial knowledge then does not borrow on long term. You issue short term bonds say for 5 years and then roll over. i.e Do a new issue of Bonds/Treasuries at a lower interest rate.

So what are the problems.
  • LKR 10 billion Bonds/Treasuries issued when only LKR 1 billion needed.
  • High Rate of Interest (11.75% when it could have been 6.75% (or less) in 5 years 
    Note, Thai (2.5%) and Vietnam (6.37) Bond yields are far lower as of
  • 30 year issue, when a 5 year issue should have been made.
  • We are paying close to Greek Bond yields of 12.7% , which Harsha de Silva called Greek Junk Bonds.
That means Sri Lanka will be over paying LKR 12.5 billion over the next 25 years.  (10 billion * 5% * 25 = 12.5)   

Greek Bond Losses

I wish Harsha De Silva would explain the above numbers of the Bond Issue and compare them his quote on LKR 2 billion (USD 15 billion) loss on purchase of Greek Bonds.

Basically the Central Bank bought Greek Bonds, probably because they are paying high interest rates.  Its basically a hedge, risky though. i.e. Use some of the money that we have borrowed and invest in higher interest paying bonds. The CB gets to keep the difference.

Because there are issues of whether the EU will bailout Greece, the Effective Interest Rate (Yield) has Increased on Greek Sovereign Debt (Treasuries/Bonds).  i.e the Value of the Bonds has decreased.

Unless the Greek Bonds/Treasuries are sold or used as collateral it is just a book value loss. 
That is until if and when the Greek Govt defaults on its interest payments.   Only one other country has done that so far, Argentina but does not mean Greece would not do it too. 

So as yet we have not had tangible loss on the Greek Bonds.

Note: If book Value of Bonds/Treasuries was a big deal, then Goldman Sachs, JP Morgan etc would be bankrupt.  Thats because their Tier 3 capital, mainly Mortgage Backed Securities (MBS) and Asset  Backed Securities (ABS) are probably worth less than 50 cents on the Dollar.  However after 2008 Financial Collapse have relaxed accounting rules/requirements (FASB and Basel) and allowed Tier 3 capital to be valued at Par, i.e. original purchase price.

Note:  Treasurys are less than one year, sold at discount. The interest is effectively the difference between the full value you get at at end and the discount price. Notes are 2-10 year maturity issues. Bonds are over 10 years.  Both Notes and Bonds pay interest semi annually.

Monday, April 20, 2015

History of Finance, Capital and Debt

Fantastic Article on the History of Finance, Capital and Debt
Karl: So when we look over the history of this era and its battle between credit and the ruling elite, the challenge was to maintain land ownership within your community and keep your people there, making sure that they had some share in the benefits of working together. This sort of independence of people being able to live off their land seems to have become a battle between democratic principles and creditors.

Michael: That’s basically so. Early common law had blockages against the things that creditors could foreclose on – the widow’s ox, the blacksmith’s anvil and basic tools of one’s trade and self-support. If you were a creditor and wanted to get somebody else’s land, you needed a legal stratagem.

In Babylonia and neighbouring Indo-European speaking communities such as Hurrian-speaking Nuzi, customary land tenure rights were only transmissible within a family or clan. The aim was to enable kinship units to supply their basic needs. The creditor’s stratagem was to get himself adopted by the debtor as number one son, as his heir. When the debtor died, the number one son, the creditor, would inherit most of the land, as if he were part of the kinship-based community. A Babylonian proverb reflects this practice: “A creditor has many relatives.” These subterfuges that creditors used are much like the small print that bank lobbyists write into today’s bankruptcy laws to stack matters in their own favor. Creditors and Wall Street have always been subtle in finding end runs around laws, obeying the letter of the law but changing the spirit of the law.

Saint-Simon founded a school of reformers in France that realized that in order to industrialise the nation, catch up with England and overtake it, it had to move banking beyond its medieval stage. Instead of making lending to businesses in exchange for interest payments – which can force them into bankruptcy when sales turn down, bank loans should really be made on the basis of profit sharing.This is how commercial loans were made back in Babylonian times. Saint-Simon’s idea was to make banks more like mutual funds. Their fortunes would rise orfall with those of their business clients.

The main country that adopted this industrial banking principle was Germany as well as other central European countries. Their banks invested in their customers as stock owners as well as acting as creditors. They acted basically as the forward planning arm of industry, working with governments to promote export sales abroad.

Until World War I most futurists, from Karl Marx to regular businessmen, expected banks to take the lead in planning society. But after Germany lost World War I, the world reverted to Anglo-American banking. This was basically short-term hit and run. Banks still don’t make loans for industrial development. They do lend for raiders and mergers to take over companies, and also to ship exports. But they’re not set up to actually fund industrial capital formation. So society has fallen back in the last hundred years to the opposite of what classical economists and what 19 th-century futurists expected banking to become.