09 December 2011
Debt & Public Finance
– The reopening of the House investigation on the P35-billion PEACe bonds, or Poverty Eradication and Alleviation Certificates, has deepened the controversy following the statements from the Department of Finance and the Freedom from Debt Coalition.
During the public hearing conducted Tuesday by House Committee on Good Government and Public Accountability chair Jerry Treñas, evidences surfaced suggesting that the government may have incurred losses from the transaction ten years ago, following signs of irregularities in the bidding process.
The DOF, through its lawyer Ephyro Luis Amatong, presented a part of the study that it has been undertaking, describing the PEACe Bonds deal “one of a kind.” He revealed “strange” patterns of behavior during the auction and when sold in secondary and tertiary markets.
Amatong explained that during the actual bidding, the government got a 12.75 percent interest rate for the 10-year zero-coupon bonds. CODE NGO/RCBC that won the bids immediately resold to the secondary market at 8.25 percent to 9 percent in interest rate, an indication that the government could have borrowed the funds at a lower interest rate than the winning bid.Highest variance
Maria Teresa Diokno, former FDC president, said that the PEACe bonds transaction has the highest variance on record in the entire history of Treasury bond auctions.
In a competitive bidding wherein bidders have the same competencies and access to the same information, the variance or the difference among the bids would be small, she explained.
Diokno said that if one calculates the ratio for government auctions for other 10-year bonds from 1998 to 2001, he or she will get a variance in yield to maturity (YTM) of only 0.422 percent. “Oddly, when we compared the highest bid with the lowest bid for the PEACe bonds, the variance in yield to maturity was 5.752 percent. Comparing the value of the bond between the highest and lowest bid results in a difference of 70 percent,” she said.
“There are two implications here: One is that information was not equally shared which is why bids varied so widely. The second is that this should have been taken as a signal by the Treasury then that there was a failure of the auction. So my question is why didn't the Treasury declare a failure at that time?” stressed Diokno.Information asymmetry
Ricardo Reyes, current FDC president, said during the hearing, that the Treasury reported to have received 45 bids from 15 GSEDs or government securities eligible dealers.
“CODE-NGO and RCBC would not readily admit it, but they won the entire auction. If the auction were a ‘level playing field’ where GSEDs have the same competencies and access to the same information, the chances of RCBC winning all its four bids is 24 in 3,575,880 or 0.0007 percent. Despite such odds RCBC won all its four bids. This means that RCBC operated on either a tremendous advantage, or on a dire need far greater than its competitors, or both,” said Reyes.
He added that the auction may not have been competitive.
“If it were, the other financial institutions would not have been willing to pay more than the acquisition price of RCBC. However, soon after the October 16 auction the banks who took part in the auction were willing to buy the bonds from RCBC capital. This means that they were willing to buy them at a price higher than RCBC’s acquisition price,” he said
Reyes further said that either one of these assertions is true: that there could have been collusion among the buyers; or that the other bidders were not well-apprised about the properties of the bond, thus there was an information asymmetry between RCBC/CODE-NGO and the rest of the bidders.
“If one of this is true, there is a clear loss for the government since at that time the banks could have given the treasury more proceeds from the auction,” Reyes said.Debt-creating endowment
Diokno explained that the PEACe Bonds, while it enabled the creation of a P1.4 billion endowment for Peace and Equity Foundation (PEF), resulted in an increase in debt of about P35 billion, or about 25 times the amount of the endowment.
“This is the exact opposite of the debt swap that happened in the mid-90s between the governments of Switzerland and the Philippines, which created the P455-million endowment for FSSI and, at the same time, reduced the debt by an equal amount,” she said.
The next hearing, according to Congressman Treñas, will be in the third week of January 2012 when the DOF expects to complete its study on the PEACe bonds. -30-NOTES TO REPORTERS/EDITORS:
• Committee members present during the December 6 public hearing were congressmen Jerry Trenas, Rufus Rodriguez and Rodolfo Albano. Deputy Minority Leader Carlos Padilla and COOP NATCCO Partylist Rep. Cresente Paez were also present.
• The Department of Finance was represented by lawyer Ephyro Luis Amatong.
• The Freedom from Debt Coalition was represented by its current president, Ricardo Reyes, former president Maria Teresa Diokno and secretary-general Milo Tanchuling.
• CODE NGO was represented by its executive director, Sixto Donato Macasaet; while the Peace and Equity Foundation (the beneficiary of the endowment) was represented by its current executive director, Bobby Calingo.