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$500m should be redirected to pay for fuel, medicine and other essentials, experts say

Sri Lankan rupee banknotes sit in a bucket at a fruit stall in Colombo. The country is running out of imported food, fuel, medicine and a key ingredient of milk tea. © Reuters

COLOMBO — Sri Lanka’s top economists and business leaders are urging President Gotabaya Rajapaksa’s government to default on a debt repayment next week and to use the nation’s foreign currency reserves to buy fuel, food, medicine and other essentials.

Ajith Nivard Cabraal, governor of the Central Bank of Sri Lanka, on Jan. 5 tweeted that the CBSL has allocated $500 million for an International Sovereign Bond maturing on Tuesday. Since the announcement, many experts have come out against the allocation.

Shanta Devarajan, a former World Bank chief economist from Sri Lanka, suggested that the island’s acute shortage of foreign currency reserves is exacerbating everyday problems like long lines to buy cooking gas, rapidly rising food prices, more frequent power outages and a lack of powdered milk, a staple in a hot, tropical country where many homes do not have refrigerators and millions of people thirst for milk tea.

“This $500 million could enable people, especially poor people, to buy and cook food for themselves and their children,” Devarajan wrote in the DailyFT, a Sri Lankan newspaper. “Instead, the government is choosing to reimburse bondholders, who are hardly poor.”

Following a $1.5 billion currency swap with China, Sri Lanka in December managed to boost its reserves to $ 3.1 billion. According to Fitch Ratings, that’s just enough. The agency says Sri Lanka has $3 billion worth of foreign currency debt repayments coming due during the first quarter of this year.

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Russia “Confirms” It Has Plans To Restore Assad Government In Syria

October 20, 2015

Russia “Confirms” It Has Plans To Restore Assad Government In Syria

Watching the US attempt to explain to the public why Washington can’t join the Russians in targeting extremists in Syria has been entertainment gold. The fundamental PR problem revolves around the fact that the West has gone out of its way to hold up ISIS as the quintessential example of pure, unadulterated evil that must be eradicated at all costs and yet when Moscow began bombing ISIS targets and publicly implored the US to join in, Washington said no.

If you’re the public that seems strange. To be sure, everyday Westerners are accustomed to Russophobic propaganda in the news and in cinema and the public is thoroughly conditioned to think of The Kremlin as a weird, multi-colored palace complex staffed with hundreds of James Bond villains in a country where it’s always dark, and always snowing. That said, Western leaders have had a difficult time explaining why that’s somehow worse than ISIS, whose slickly-produced videos have so far depicted a series of beheadings, a Jordanian pilot being burned alive, “spies” being drowned in a cage, and four men being packed into a Toyota Corolla which is then destroyed at close range by a rocket launcher.

The answer, of course, is that ISIS and the various other extremist groups battling for control of Syria have almost all received training and funding from the US and its regional allies at one point or another and at the end of the day, destroying ISIS nets nothing for Washington in terms of geopolitics. In fact, were the group to go the way of the dinosaurs, it would help to restore the Assad regime which is the worst possible outcome in the eyes of the US, Saudi Arabia, and Qatar.

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Junk Bond Issuance Collapses, “Distress Ratio” Spikes

October 12, 2015

Junk Bond Issuance Collapses, “Distress Ratio” Spikes

Fitch Ratings is fretting about junk-bond defaults. “After five issuer defaults already this month accounting for nearly $2 billion in new volume,” Fitch now expects that the default rate will hit 3.5% by year-end, up from 2.5% to 3% a few days ago. Through September, the trailing 12-month default rate was already 2.9%.

Worse: a 4% default rate by year end is “more likely” than a 3% default rate. And it’s “set to rise further in 2016.”

In non-recessionary periods, the default rate averages 2%. During recessionary periods it averages 11%. That’s why recessions are terrifying for junk-bond holders. Junk bonds are called “junk” for a reason.

We’re not there yet. But the energy and metals & mining sectors are getting there: in September, their default rates were 5% and 10% respectively. Fitch: “These sectors experienced three consecutive months with over $4 billion in defaults, a level not seen since 2009 when monthly volume in the entire market exceeded $4 billion for seven straight months.”

There is a period before default when investors are picking up on the troubles the company is having and demand higher yields in return for taking on the risks. Debt is considered “distressed,” when the spread between its yield and the yield of US Treasuries surpasses 10 percentage points.

The toxic miasma of “distressed debt” is engulfing more and more junk bonds and leveraged loans. Back on September 24, Standard & Poor’s announced that the “distress ratio” for junk bonds, after rising since late last year, hit 15.7%. It was the worst level since December 2011. It was terrible. But now, the distress ratio for junk bonds has soared to 21%.

This chart from LCD HY Weekly shows the distress ratio of junk bonds (red line) and of leveraged loans (blue line). Leveraged loans are generally secured by collateral and hold up better in bankruptcy than bonds, so their yields remain lower even if unsecured bondholders are headed for a total wipeout. Now the distress levels of both are soaring:

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Did Argentina’s CNV Pass a Law to Avoid a Bond Payment?

October 3, 2015

Did Argentina’s CNV Pass a Law to Avoid a Bond Payment?

Last Tuesday, Argentina’s securities regulator, the CNV, shocked markets by announcing Resolution 646 requiring that mutual funds price dollar-denominated assets in pesos at the official government rate rather than the market rate that is closer to the parallel or blue dollar. Despite efforts from banks and industry organizations to organize a longer time period in which to react to this change, Economy Minister Axel Kicillof refused to meet with representatives and the law came into force on Friday.

Unlike other government interventions in the parallel market, this sudden “pesofication” of somewhere to the tune of US $15 billion worth of investor assets came as a real shock to the industry — as in no one saw it coming.

So what would entice this government to force the conversion of dollar-priced assets held by mutual funds into pesos at the official rate? Mutual funds are investment vehicles created for small and medium savers. They have a low minimum entry point and up until last week were a way for Argentines to save money without squirreling away physical dollar bills in boxes buried under stairs. This measure actually hurt small savers and helped no one.

Previous interventions in the market have served to bring both the blue dollar and the bond-linked contado con liquidacion (ccl) or “blue chip swap” rates down. This shock caused bond prices to temporarily plunge and the blue dollar rate to shoot up to record highs of 16.05 ARS/USD. Furthermore, the effects on the ccl market were short lived. Before the announcement, the ccl rate was at 14.05 ARS/USD. It dropped to 13.19 before and has rebounded back to 13.85 ARS/USD. So in this case, the government temporarily brought down bond prices at the expense of small savers and the blue dollar. What gives?

…click on the above link to read the rest of the article…

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