- The large/foreign institutional ISB holders for the time being, are amenable to a restructuring and/or re-profiling and/or a haircut on the principal in return for a similar treatment of the domestic sovereign debt. As to why they take this position is varied and opaque, though one intelligent guess is that most current holders for the being have acquired these bonds at a discount at the time Sri Lanka’s sovereign rating was continuously sliding in late 2020 and early 2021. They’d rather recover the acquisition plus holding cost than lose the entire investment, albeit even at the discounted acquisition price.
- The fly-in-the ointment here is their demand for a similar treatment to be imposed on domestic sovereign debt.
- The rest of the external sovereign debt is that of bilateral debt and multilateral debt – any restructuring of which has to be largely political and diplomatic in approach and in resolution. What these creditors have asked in return for any restructured debt agreement, is unknown at best though it can be safely assumed that any concessions extracted from Sri Lanka would be more geopolitically strategic than financial.
- The DDR is driven by the MoF/Treasury who is the Creditor, and who for multiple reasons, is labouring under the weight of an inability to meet its principal repayment commitment and possibly its interest servicing commitments.
- Without a DDR there will be no ISB debt restructuring, and without these two, the extent of the multilateral and bilateral debt restructuring will be so onerous as to fail.
- A failed composite debt restructuring will collapse the balance of the EFF, not to mention the deep and long scars Sri Lanka will be left with and the heavy burden of bankruptcy.
- It is the MoF/Treasury who is the principal sovereign debtor and it is the Secretary to the MoF/Treasury who should be taking the lead and ownership in dealing with and negotiating with the banks and FIs on the DDR – not the CBSL who is the banking regulator, who may incline towards a degree of bias and even sympathy with the banks and FIs they regulate and the banking system whose systemic stability they are responsible for.
- The FD holders or even the interbank creditors in the recent bank failures of Silvergate Bank, Signature Bank, Silicon Valley Bank (SVB) and even Credit Suisse were not subject to cuts by the regulators concerned. The pain was borne by the AT1 Bond holders and/or the CET1 holders.
- There is however, the clear and painless option of a possible regulatory forbearance on capital, liquidity and leverage ratios, even those defined by Basel III.
- There are also other perfectly credible options for banks and FIs to take. Capital augmentation with Regulator forbearance on the single voting shareholder limit is one such. Another is an issue of contingent convertible bonds or CoCos, to be redeemed when the CT1 level is restored. Another, though against-the-wall option is to convert any FD and other liability cuts into voting shares subject to regulatory limits on voting equity. A run on a bank generally means funds move from a riskier bank to a safer bank and more so if there is a general perception that the BOD and Management of a bank has not done their job effectively. The Financial Sector globally has already seen 4 major banks collapse this year. Signature Bank, Silicon Valley Bank, First Republic Bank and Credit Suisse. Not one depositor in these banks lost a cent. Those who lost out were the shareholders.
- UBS first offered $ 0.27 per share of CS and after a weekend of negotiating they increased it to $ 0.81 per share and that too was paid as an all share offer (no cash) as 1.00 UBS share for 22.48 CS shares. 12 months ago this stock was trading at circa $6.00 and the Saudi National Bank invested $ 1.5 billion in Nov 2022 at circa $ 4.00 per share for a stake of 10%. Signature Bank and Silicon Valley Bank shareholders lost everything when the FDIC took it over and are now looking to sell it to First Citizen Bank and Flagstaff Bank. HSBC UK paid just GBP 1.00 for the UK part of SVBs business. All these steps were taken by the regulators without any cost to the government or the taxpayers. There is ample evidence that if the regulators do the right thing, depositors, taxpayers, etc. can be safeguarded and the banking sector need not go into a crisis. The President needs to take a leaf out of Theodore Roosevelt’s book, adopting the former US President’s mantra to “speak softly and carry a big stick” to get the banking reforms through.