ECONOMYNEXT – Sri Lanka’s primary dealers will be decapitalized by a possible domestic debt restructuring, with a coupon clip likely to deliver the biggest shock, a top independent primary dealer said.
Primary Dealer was founded by the late AJ Jayewardene. AJ Jayewardene is a classic economist who reformed the central bank to print less money, reduce financial repression and high inflation, and end the widespread strikes that plagued the country from 1980 until about 1995. I was allowed to.
There are bank and non-bank primary dealers. Dealers collectively must subscribe to all bonds offered at each auction.
A capital depletion that wipes out primary dealers could hit the government’s ability to raise funds.
“Currently, with foreign funding sources closed, the government relies primarily on the domestic market to fund its deficits,” said the chief executive of non-bank independent primary dealer Capital Alliance Plc. One Ajith Fernando said:
“Every week, primary dealers buy and distribute more than Rs 100 crore of debt.
“Thus, any domestic restructuring that wipes out primary dealers or severely impacts the ability of dealers to perform their jobs will have a severe impact on the government’s ability to raise funds.”
Sri Lankan officials dealing with the restructuring are trying to avoid a default on domestic debt based on debt sustainability analysis, whose holders, unlike foreign investors, are still trying to pass on the debt.
Sri Lanka’s government bond yields, which had fallen to around 20-23% as the external sector began to stabilize, rose to 30% on fears of domestic debt restructuring.
Due to the flaws in the latest debt settlement framework used by the International Monetary Fund by countries in default (mostly soft pegs that set wrong target rates for stimulus packages and depleted foreign exchange reserves in currency crises), No early clarification. Treatment of domestic debt.
Unlike foreign investors, domestic buyers continue to fund the government in the style of senior creditors.
Primary dealers are required to primarily deal in government bonds and have limited operations.
“The late AS Jayawardena called them a big family of central banks simply because they were established as an extension of the bank itself,” says Fernando.
“They cannot engage in other significant businesses and are allowed to invest primarily (95%) in government securities due to regulations imposed by the central bank itself.
“Deposits are also not allowed and can only be funded primarily against government securities.
An independent primary dealer is required to hold a capital of approximately Rs 2.5 crore. Some have capital from He 4 billion to He 5 billion.
“That means they’re not in a position to absorb big losses,” says Fernando.
“Losses severely limit the ability of primary dealers to operate. Primary dealers distribute large volumes of bonds each week, but their total holdings at any given time are insignificant compared to their total outstanding debt.
“It might be about 100 billion to 150 billion. So the benefits of restructuring PD’s holdings outweigh the negative effects.”
Debt consolidation can be done in several ways. One is a coupon clip (lower interest rate) and the other is a haircut (lower face value). The third is extended maturity.
“In terms of DDR types, coupon clips are probably the most damaging, but maturity extensions to reduce the total funding required may be a little more manageable,” says Fernando.
“However, this depends on the type of securities each dealer deals in. In some cases, even a small denomination of a long-term bond may not hurt as much as a coupon depreciation.”
In Sri Lanka, a large amount of rupee debt is held by captive sources such as employee provident funds and employee trust funds, which are legally required to be held, but banks also have liquidity requirements. (Colombo/Jan08/2022)
