Investing in Govt. securities today riskier than Greece bonds

Former Central Bank Governor Ajith Nivard Cabraal said an investment today in the Sri Lankan Government Securities such as Treasury Bills, Treasury Bonds, Development Bonds, and International Sovereign Bonds pose a much higher credit risk than that faced by those who invested in Greece Bonds in April 2011.

He said this in response to allegations made against him with regard to the investment in the Greece Bonds.

Mr. Cabraal said, “Several MPs and politicians have been regularly referring to the Greece Bonds investment by the Central Bank, insinuating that a massive fraud has been perpetrated by persons in authority at the Central Bank including myself. I have refuted these allegations on many occasions with detailed explanations, but these politicians and their followers have continued to make their baseless allegations, ignoring the explanations and contentions that clearly disprove their allegations.

"Therefore, I now wish to refer them directly to the Fundamental Rights Case No: 457/2012 in relation to the Greece Bonds investment which was filed against the Monetary Board in 2012 by Sujeewa Senasinghe, MP, and argued by Upul Jayasuriya, PC, at which the Attorney General appeared for the Monetary Board.

"In that FR action, after 17 hearings that spanned about 2 years, “leave to proceed” was refused by a 3-Judge Bench of the Supreme Court comprising Justice K. Sripavan, (later Chief Justice), Justice R. Marasinghe and Justice S. De Abrew in September 2014 with the order that, “Considering the totality of the circumstances, it is neither possible nor desirable to hold that the Members of the Monetary Board in taking a decision to invest in Greece Bonds, have acted arbitrarily, unreasonably and in a fraudulent manner.” Refer SC Judgement of 18.09.2014 in the website of the Supreme Court at: http://www.supremecourt.lk/images/documents/scfr_application_457_2012.pdf

"In the light of such a clear and unambiguous decision of the Supreme Court, it is shocking to see some politicians and their followers attempting to maintain the canard that there has been a fraud in relation to the investment in the Greece bonds. In this connection, a few extracts from the Supreme Court decision may also be significant to understand the context.

“The Auditor General …has stated though the Central Bank had incurred a loss from the investment in Greece Government Bonds, it has earned a total net profit of US$ 430.2 million on International Reserve Management during the year 2011….”

“The investment in Greece Bonds and its trade forms part of the risk management strategy. If all investments are maintained as risk free investments the return would be negligible. The Central Bank therefore has to select a mix of low risk and risk bearing investments expecting a reasonably high return.”

“The decision to invest in such Bonds was based on the trade-off between different risks faced and the Central Bank’s tolerance for higher risk on a very small part of its portfolio…”

“Investing in high yielding sovereign paper is an integral part of fund management of many funds in the world and the Central Bank too had followed a similar practice in investing a tolerable proportion of its resources (0.6%) in Greece Government Bonds”.

"From the above Supreme Court decision, it would be patently clear that the accusations by the various politicians and their followers are only designed to tarnish my reputation and that of the senior officials of the Central Bank. Unfortunately, those efforts seem to have intensified in recent times because some of the current government politicians have been caught red-handed in scams which have caused losses amounting to hundreds of billions of rupees to our country.

"It is also relevant to reiterate that the Central Bank made its highest ever profit from International Reserve Management in the year 2011 amounting to US$430.2 million, even after setting off the loss arising from the investment in Greek Bonds. As a percentage, this profit represented a yield of 6.6% on the average International Reserve. In comparison, in the years 2015 and 2016, the profits from International Reserve Management has crashed to just US$111 million and US$53 million respectively, which represented return of a mere 1.5% and 1.1% on the average International Reserves in the respective years.

"Further, it is also to be noted that in April 2011, when the Central Bank invested in the Greece Bonds, the international credit rating of Greece was BB+ which was 3 notches higher than Sri Lanka’s current rating of B+ (negative)."