Former Governor Cabraal’s statement on Greek bonds – A comment

By Janitha Devapriya

The statement of former Central Bank Governor Ajith Nivard Cabraal in the Daily FT of 26 August, where he defends the investment of Central Bank in Greek bonds in 2011 as a ‘wise’ move in risk management strategy of the foreign exchange reserves deserves comment. 

Let us take risk management. As defined in Wikipedia, risk management is the identification, assessment, and prioritisation of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimise, monitor, and control the probability and/or impact of unfortunate events or to maximise the realisation of opportunities. Risk management’s objective is to assure uncertainty does not deflect the endeavour from the business goals. Risks can come from various sources including uncertainty in financial markets, threats from project failures. 

The credit rating on Greek bonds was BB+, quoted by Cabraal to imply in a subtle way that it was a positive factor. BB+ rating is either Standard & Poor’s or Fitch, which was not specified by him but this means that the said bonds were “Non-investment grade or speculative”. In other words, it means, the Greek bonds were in fact in the same category as ‘junk bonds’. 

Is it prudent for the Central Bank to risk its meagre foreign exchange reserves by investing in junk bonds? No person in his proper senses would risk his money on junk bonds unless the funds are earned illegitimately. Cabraal had in fact decided to go ahead knowing very well that he was risking the country’s reserves belonging to the people, like playing casino. 

He is trying to camouflage the huge loss incurred by the Central Bank on Greek bonds in 2011 by quoting the overall profit earned by the foreign reserves invested in other instruments in that year. In fact, the Central Bank was saddled with worthless paper and the entire investment of Euro 22 million or Rs. 3.4 billion was lost to the country. In the light of this, one does not see any attempt made to minimise the risks by the Central Bank when investing in Greek bonds.

He is trying to exonerate himself by referring to the decision of the Supreme Court in the Fundamental Rights petition filed by MP Sujeewa Senasinghe in 2012 where judgement was delivered in 2014. It is also pertinent to note the observations of the learned judges of the Supreme Court, which went on to state, “At the hearing before us, learned Counsel for the Petitioner sought to argue that Clauses 5.2.1 and 3.3.2 of FRMG have not been complied with. It is noted that in his Petition, the Petitioner has failed to take up the said objection; neither sought to amend the Petition after a copy of the FRMG was made available in September 2012. Hence, the new matters now raised are outside the time limit prescribed in Article 126(2) of the Constitution and cannot be gone into.”

However, in his report to the COPE on the subject, the then Auditor General had in fact questioned the “viability” of the Central Bank’s analysis on “market conditions” in relation to the Greek bonds and held that this “investment is questionable”. 

Making matters worse, according to press reports on COPE proceedings at the time, the AG had observed that no approval of the Central Bank’s Monetary Board had been obtained for the investment in question. Approval had been given by Governor (Nivard Cabraal), a Deputy Governor and an Assistant Governor stating that “these securities will be added to the high yielding tranche and in general to be kept until maturity”. (As reported in the Sunday Times of 8 July 2012). 

Sadly, there was nothing worthwhile to be kept till maturity. In their response, the Central Bank did not dispute the colossal loss nor offer answers to the Auditor General’s observations. The Central Bank at the time stated on its website: “The Greek bonds had the backing of the European Financial Stability Fund (EFSF) which had an AAA rating and therefore the bonds were considered sound even though the Greek bond rating itself was lower than the investment rate.” 

What this says is that some other supporting fund had a higher credit rating and therefore the rating of Greek bonds was apparently not a matter of concern to the CBSL. Can anyone accept such a lackadaisical attitude on the part of the regulator of the financial sector of the country?

Let me further quote a media report on COPE proceedings which explains the nonchalant attitude of the former Governor Cabraal. “A shocked COPE Chairman and Minister D.E.W. Gunasekera had asked Governor Cabraal whether he did not realise that Greece was headed for economic ruin when the investment was made. Mr. Cabraal defended his action saying the Central Bank had looked at all portfolios before making the investment. He had suggested that in some investments the bank also took calculated risks.” This shows that he was taking liberties with the people’s funds and trying to explain away the colossal loss after engaging in ‘gambling ’ which no central banker worth his salt would attempt.

One cannot also ignore the fact that this very same Governor Cabraal was too keen to enter into the hedging deals on petroleum imports and the Government had to incur a colossal expense or loss running up to Rs. 9.7 billion as at 31 December 2014, including Rs. 5,261,827 as travelling expenses for the lawyers and officials to attend arbitration proceedings abroad, in settling the dues to the banks that stood to gain on somewhat one-sided hedging contracts. These disclosures made by the Auditor General’s Department were reported in the Sunday Times of 10 January 2016. 

In an attempt to cover up his sins, he makes wild accusations against politicians saying, “Unfortunately, those efforts [meaning charges levelled against Cabraal] seem to have intensified in recent times because some of the current Government politicians have been caught red-handed in scams which have caused losses amounting to hundreds of billions of rupees to our country.”

I say his accusation is wild because the loss he is alleging is not specific (hundreds of billions of rupees). If he is hinting about the alleged loss on the Treasury bonds issue of 27 February 2015, even the Attorney General has opined that the said loss should be an estimate calculated on a basis that is easy to understand and which would also stand the test of scrutiny in courts. So the figures now bandied about losses in the infamous Treasury bond transaction are mere speculative estimates and a better insight will only be available, hopefully, when the Presidential Commission inquiring into the matter reports its findings to the President who will refer it to the Attorney General for further action. 

Whilst the alleged losses on the Treasury bonds transactions are yet to be assessed, the losses already incurred by the people due to imprudent acts of Governor Cabraal, directly or indirectly in the Greek bonds and hedging deals, run to at least Rs. 13 billion and his troubles will not be over anytime soon though he wishes that they can be swept aside by putting forward deceptive arguments.