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