Oct 10, 2007 (LBO) – Sri Lanka’s main opposition United National Party (UNP) said an assessment by a rating agency that a future administration run by the party would repay a sovereign bond that is now being marketed is wrong and insisted that it would default.
The UNP has said the attempt to raise around 500 million dollars abroad was ‘illegal’ as it was contrary to a fiscal responsibility law and proper parliamentary approval has not been sought to issue the bonds.
The UNP referred to a Fitch Ratings opinion two days ago which said “any future UNP administration would not wilfully default,” the bond for which road shows have now started.
“This statement is false. We further state that no representative of Fitch discussed this issue with the UNP,” the party said in a statement issued under the hand of its general secretary.
“HSBC Bond issue is not in accordance with the law and therefore has no validity.
“Therefore, a UNP Government will not take responsibility for the repayment of this Bond.”
Sri Lanka’s finance ministry has said it had the power to raise the bond as it was below an overall borrowing threshold.
The UNP said it has made its stance clear in a statement issued on October 01, and the position has not changed since then.
The earlier statement referred to an IMF assessment which said Sri Lanka national debt averaged over 101 percent of the economy in the past five years and care should be taken not to “overload the already high government debt burden.”
It had said that Nepal’s government debt was only 63 percent of the economy, Bangladesh’s 49 percent and India’s was 85 percent.
The UNP said the IMF assessment confirmed its own stand that Sri Lanka could not afford the sovereign bond.
“In other words, we are taking a loan at over 7.5 percent interest rate and repaying it within 10 years when foreign and concessionary loans at about 1 – 2 percent interest with 20 – 30 years repayment periods are easily available,” the UNP said.
“HSBC and other banks are walking into this contract with their eyes open. The people of Sri Lanka should not be asked to pay for their folly.”
The bond is lead-managed by HSBC, JPMorgan Chase and Barclays Capital.
The rating agency Standard and Poor’s also added a note of caution in a statement this week which said Sri Lanka’s long-standing advantage of having concessional foreign borrowing would be undermined by excessive commercial borrowing.
S & P said the advantage was still available despite a depreciating currency that increased the burden of servicing and rolling over commercial loans.
“Hence, further recourse to commercial external funding, which would excessively raise the foreign exchange denominated interest burden and debt amortization commitments relative to the country’s foreign exchange generation capacity, could potentially diminish what has so far been a supporting factor behind the sovereign ratings,” Standard and Poor’s said. .