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Banking Sector Vulnerability to Domestic Debt Restructuring

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DeepFreakingValue

DeepFreakingValue
Manager - Equity Analytics
Manager - Equity Analytics

Banking Sector Vulnerability to Domestic Debt Restructuring Scree137

Domestic Debt Restructuring
DDR in Sri Lanka is complicated by the large holdings of rupee debt by financial institutions such as banks. As Sri Lanka’s banks are heavily dependent on income from coupon payments on rupee bonds (around 36% of their income arises from government securities, and this income is used to pay the interest on deposits and savings of the public), it would not be advisable to implement a reduction in the coupons. Consequent to a DDR that extends the maturity of domestic debt, financial institutions may need additional capital. However, temporary regulatory forbearance till yields return to lower levels can delay the need and size of the recapitalisation that will be needed.

Interest Income from Government Securities as a % from the Bank's Total Net Interest Income
Banking Sector Vulnerability to Domestic Debt Restructuring Scree137

Above figures show that on average 36% of the net interest income of major banks is from government securities. Any cut on coupons will adversely affect the profitability of the banking sector — hence maintaining coupons will be necessary to maintain financial sector stability.

By 2021 end, the Sri Lankan banking sector had Rs. 19.98 trillion in assets, which is 64% of the financial sector’s total assets excluding the Central Bank. The Licensed Commercial Banks (LCBs) dominate the sector holding 55.4% of total assets.

Domestic commercial banks and their subsidiaries (excluding Cargills Bank) were holding an average of 26% in government securities from their total assets of which 79% accounted for rupee denominated debt. Here we refer to government securities as T-Bills, T-Bonds, Sri Lanka Sovereign Bonds (SLSBs) and Sri Lanka Development Bonds (SLDBs), where SLSBs and SLDBs are dollar denominated.

Comparing the above figures with the total outstanding T-Bills and T-Bonds by end 2021 payable by the central government, our calculations show these banks together hold up to 31% of their assets.

Banking Sector Vulnerability to Domestic Debt Restructuring Scree138

Finance sector exposure to government securities (as at end 2021)
Banking Sector Vulnerability to Domestic Debt Restructuring Scree139

Public, or government, debt falls into three broad categories: external (foreign currency denominated) debt or loans owed directly by the government, domestic (domestic currency, here rupee) debt owed directly by the government and debt (or loans) owed by government-owned institutions and enterprises (which can be external and/or domestic). Sri Lanka is currently at a public debt to GDP ratio of around 121%, well above the ceiling of 80% recommended by the IMF. Restructuring external debt owed by the government only provides limited relief. External debt held by bondholders (ISBs/SLDBs) constitutes 20% of GDP, while loans to the government by multilateral and bilateral lenders are 32%. Multilateral and bilateral lenders are more likely to extend the maturity of their loans, or provide other grants or subsidies, than reduce the amounts outstanding on their loans. Furthermore, renegotiating external debt, obtaining bridging finance and receiving financial assistance from multilateral lenders such as the IMF are moot if the government has no viable path to solvency.

The present analysis, based on data up to July 2022, suggests that even with a principal cut (haircut) on ISBs/SLDBs of 50% and a 25% haircut on multilateral/bilateral loans, the projected debt to GDP of Sri Lanka will rise to 136% within 10 years at current yields. The same projections show that if in addition to external debt restructuring, there is a 10-year maturity extension (but no coupon or principal cut on domestic Treasury Bonds), debt to GDP will rise to only 101% in the next 10 years, even at the current yield curve. This leads to the conclusion that restructuring domestic debt would represent an immediate and significant improvement in the sustainability of Sri Lanka’s debt.

BY VERITÉ RESEARCH SRI LANKA POLICY GROUP
https://www.veriteresearch.org/wp-content/uploads/2022/10/VR_EN_BN_Oct2022_The-Desirability-of-Domestic-Debt-Restructuring.pdf

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Fitch Ratings downgraded Sri Lanka's Long-Term local-currency debt rating by two notches to "CC" from "CCC", citing a probable local-currency debt default in the face of high interest costs and tight domestic financing conditions- adaderana.lk

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Post Sun Dec 25, 2022 12:52 am by God Father

BOC & PB 
EPF & ETF
Com Bank & DFCC & HNB
Sampath Bank & Seylan Bank
Most affected.
Watch Closely!

For one last time they should print money and settle all the local debt. Then they should close the central bank

God Father likes this post

For decades, the International Monetary Fund has been the scourge of countries that get into economic trouble, yet its authority has never been seriously challenged. Today, this is especially dangerous. The deadly combination of inflation and food shortages is putting numerous nations on the brink of disaster. A few, most notably Sri Lanka, are already in chaos.

All too many countries are particularly vulnerable because they loaded themselves with debt during the easy-money years following the 2008-09 financial crisis, when interest rates were virtually nonexistent. Now, with the cost of money rising and open-ended central bank ATMs closing, scores of these governments will be hard-pressed to service their debts. For a number of poorer nations this means not only will the paltry incomes of people already living in real poverty shrink, but there will also be outright hunger, if not famine—a dire situation made worse by the deadly food games Vladimir Putin is playing with Ukraine’s critical grain exports.

What’s disturbing is that the amount of money these countries owe is unknown. China has lent prodigious amounts to a number of nations, but transparency here is hardly robust.

The IMF is supposed to be the economic doctor to which countries turn when they get into trouble. IMF teams fly into stricken nations and “negotiate” (in the Tony Soprano sense of the word) the terms for governments to receive bailout money. The problem is that the IMF is guilty of economic quackery on a global scale. The IMF’s foremost demand is that a country devalue its currency, yet making a currency less valuable is the very definition of inflation. It’s like telling someone who has pneumonia to go sit in the snow.

The IMF thinks the cure for inflation is to make people poorer; therefore, it forces countries to raise taxes. The agency also orders the removal of politically popular subsidies—usually for certain foods and fuel. In principle, this is fine, but the IMF’s timing is dreadful. People living mostly on the margins see their life supports disappearing, and riots result.

The IMF should, instead, be prescribing what economist Nathan Lewis dubs “The Magic Formula”: low tax rates and stable money. This combination always works. Instead of devaluations, countries should adopt currency boards, whereby their money is fixed to a reliable currency such as the Swiss franc. Currency boards unfailingly stop inflation in its tracks.

Yet the IMF’s record of cockeyed, counterproductive remedies has yet to provoke a serious challenge from its major donors, primarily the United States.

With so many countries in desperate straits, this chronic malfeasance will provoke destructive turmoil and lead to unnecessary death. True, the countries to which the IMF ministers are usually guilty of reckless spending and too much government control of their economies. But that doesn’t warrant administering patently harmful medicines to them.

Take perennially mismanaged Pakistan, which just negotiated an IMF rescue package. True to form, the IMF imposed higher taxes and the elimination of fuel subsidies, and riots rocked the country.

Steve Forbes is Chairman and Editor-in-Chief of Forbes Media. Steve’s newest project is the podcast “What’s Ahead,” where he engages the world’s top newsmakers, politicians and pioneers... Read More

https://www.forbes.com/sites/steveforbes/2022/09/27/the-imfs-monumental-malpractice/?sh=63db72a3169f

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