Breaking News – 5 bank holidays for govt. debt optimization – The purpose is questionable?
- The government and the Ministry of Finance have decided the time frame to complete the process of domestic debt optimization.
- The process is involved in getting approvals from the Cabinet, Finance Committee and Parliament.
- For this purpose, banking and financial market stability is required for 5-day period.
- However, week-end banking, online banking and ATMs will function as usual.
- The CB Governor assured that this debt optimization would not have any impact on bank deposits and deposit interest rates.
- First, even the meaning of the debt optimization has not been clarified yet although the authorities refer to debt restructuring with regard to govt. foreign debt. Therefore, the need for a bank holiday for domestic debt optimization is unknown.
- Second, according to official comments made from time to time, debt optimization also is similar to debt structuring as the government hopes to reduce its domestic debt service burden through the rework of debt contracts on Treasury bills and Treasury bonds. Debt haircut, interest rate reduction, maturity extension and deferment of debt service are general elements of the debt rework.
- Third, if the debt optimization is a sort of debt restructuring or rework, it is difficult to understand why a specific bank holiday of 5 days is required for the completion of approval process.
- Fourth, once the elements and modalities and legal clearance including any judicial process are determined by the relevant authorities, debt restructuring process is nothing but adjustments of financial statements of investors, i.e., banks, other financial institutions and individual investors, of the date applicable to the debt rework announced by the government.
- Fifth, why same holiday for non-bank financial institutions was not declared is an issue although they also are investors in government securities.
- Sixth, the approval process such as Cabinet, Finance Committee and Parliament does not involve in any bookkeeping as highlighted above. Therefore, why a specific bank holiday is required for the completion of this approval process is not established.
- The CB Governor did not clarify why a specific bank holiday was required for the Parliamentary approval process on so called domestic debt optimization.
- However, a trigger of a systemic risk of unwanted or undue depositor panic as I myself felt from this breaking news should not be discarded, given the present status of economy’s bankruptcy caused by the debt and foreign currency crisis.
- The secret of banking is the depositor trust and not the Central Bank or bank financial statements.
- Therefore, the authorities should not paly games with depositors as their readings of risks and herd behaviours cannot be modelled or forecasted in advance while the probability of contagion of a debt and foreign currency crisis across the domestic currency is high as experienced in many countries.
- The CB Governor’s assurance that depositors (deposits or interest rates) would not be affected by the proposed debt optimization is technically incorrect because that depends on the financial strength of banks and financial institutions to absorb any financial hit caused by the debt rework on their investments in government securities. In addition, if depositors feel unsafe of their deposits consequent to the debt rework, any depositor turmoil could cause losses to uninsured deposits unless the government pay them back. Nobody can exactly predict such instances.
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