GOG BOND DEFAULT RATTLES FINANCE COMMUNITY

UNCLAS GEORGETOWN 000530

SIPDIS

SANTO DOMINGO FOR FCS
SIPDIS

E.O. 12958: N/A
TAGS: EINV EFIN ECON EMIN GY
SUBJECT: GOG BOND DEFAULT RATTLES FINANCE COMMUNITY


1. SUMMARY: Media reports have revealed that the GOG is
seeking better terms on US$20 million of government bonds
after failing to pay on maturity. The default, as well as
the flat-footed GOG response, has shocked the finance
community and signals a next stage in the GOG's dogged
pursuit of debt relief. END SUMMARY.


2. On June 2 the independent Stabroek News quoted
Information Liaison to the President, Robert Persaud, as
saying the GOG is seeking Paris Club-like terms of up to 90%
relief on bonds that matured on May 17. The GOG issued the
bonds in 1994 to rescue the then Guyana Mining Enterprise
following the restructuring of the bauxite industry.
Citizens Bank Limited subsequently bought a large number of
the bonds at a discount and through sub-participation
agreements. In addition, more than twenty institutional
investors and several local pension funds hold the bonds.
The default reportedly came as a surprise to the
bondholders, who had been receiving yearly 5% tax-free
interest and had no prior signal that the GOG would seek to
redefine the terms.


3. In the wake of the default, several private sector
observers have criticized the GOG's action. Chairman of
Private Sector Commission, Yesu Persaud, was reported as
saying that the default was not a good signal to investors,
while President of the Guyana Banker's Association, Michael
Archibald, called the GOG's position "very difficult to
understand". Allan Parris, Managing Director of Citizens
Bank, labeled the action by the government as "ridiculous"
and suggested that the Bank is giving the government some
time before taking unspecified measures.


4. Local financial analyst and commentator Patrick Van Beek
suggests the GOG's action was short-sighted, as the GOG
could have leveraged excess liquidity in the financial
system by issuing long-term Guyanese dollar denominated
bonds to repay the current bonds and salvage its
creditworthiness. In addition, George Edwards, Operations
Manager of the Guyana Association of Securities Companies
and Intermediaries Inc (GASCI) believes that the decision by
the government to not to honor its debt obligations will
undermine plans to create a secondary market with bonds
being traded on the stock exchange.


5. COMMENT: While the default does not signal an impending
balance of payments crisis, the GOG's apparently nonchalant
reaction is revealing. Finance Minister Saisnarine
Kowlessar has made no public comment to date. More
disturbingly, Lawrence Williams, governor of the ostensibly
independent central bank, has been quoted as saying he would
"prefer if the government would make its position clear"
before commenting. Most importantly, the misplaced reference
to Paris Club terms in managing its internal debt suggests
that the default may be a textbook example of moral hazard--
inspired by Guyana's substantial external debt relief--
creeping into its domestic obligations.

BULLEN