Breaking News - 5 bank holidays for govt. debt optimization - The purpose is questionable?


Last night, the CB Governor abruptly announced a bank holiday of 5 days from coming 29th. Accordingly, a special bank holiday was announced for 30th so that 4 actual holidays plus the special holiday become 5 days of bank holiday.

I felt panic whether my deposits at banks could be unsafe. The reason is that, as I am aware from other countries, the authorities declare bank holidays to prevent any anticipated bank runs or panic depositors running to banks to withdraw their deposits unexpectedly.

However, the purpose of the bank holiday declared above was described as the time period required for the completion of the government domestic debt optimization already announced in the media.

The news presented by the CB Governor covered following items.

  • 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.

My Observations

  • 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. 
Accordingly, the adjustment will involve in the value of their assets in government debt/securities, capital if any loss to their assets is realized through the debt rework and income statement of the current quarter and financial year if any loss is to be assumed (by way of reduced interest rates, debt haircuts, etc.). As such, their liabilities such as deposits and borrowings utilized to fund the investments in government debt in the balance sheet should not be directly affected as at the restructuring date. 

Therefore, the debt rework is only an accounting/book-keeping exercise for both the government and investors and, therefore, does not require any specific holiday period for banks or other investor financial institutions such as finance companies, superannuation funds and insurance companies.

  • 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. It is only for legal documentation of the Ministry of Finance on debt rework. Therefore, why a specific bank holiday is required for the completion of this approval process is not established.

Overall Comment

  • 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. Therefore, financial market volatility can begin when banks reopen on July 4th depending on new expectations unless the CB prints money to calm down destabilzing speculations. The trigger could be financially weak small banks.

  • The CB Governor's assurance that depositors (deposits or interest rates) would not be affected by the proposed debt optimization is factually 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 pays them back. Nobody can exactly predict such instances but instances are triggered unexpectedly through facts or rumours.

  • This whole process is undemocratic as sins of debt mismanagement are passed to the public through the exercise of the govt power while those who mismanaged debt continue to enjoy their public seats without any inquiry whereas same persons propose such debt rework to cover-up their mismanagement.

(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 10 Economics and Banking Books and a large number of articles published. 

The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)


 

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