|Oil hedging crisis
UNP MPs Ravi Karunanayake and Dayasiri Jayasekera seen discussing the realities of hedging with Ven:Theeniyawala Palitha Thera , who along with Mr Karunanayake filed a petition in court against the oil hedging deal. Pic by Berty Mendis was taken at a recent seminar on the hedging issue.
Senior bankers said foreign trips for Ceylon Petroleum Corporation (CPC) officials related to the oil hedging contracts were unethical while business leaders feel the Supreme Court's interim order to withhold the payments to Standard Chartered and Citibank will not have negative repercussions for Sri Lanka.
A senior banking industry official said there is a lot of validity in what has been reported on the impropriety of the hedging agreements entered into with Standard Chartered and Citibank. "If it is a proper commercial transaction, you won't take the Chirman (De Mel) on foreign trips," the official said, referring to the fact that Mr. De Mel was taken on overseas trips by the banks to learn about hedging. He added that he was certain the head offices of the two banks will think twice about pursuing any legal action since there are highly questionable and ethical issues where these banks are concerned.
Former Chairman of the Ceylon Chamber of Commerce (CCC) Chandra Jayaratne said, the negative sentiment may have been a problem if payments were withheld prior to the Supreme Court interim ruling but the Court has only withheld payments until the final inquiry is complete. “If the Court holds that the hedging agreements are tainted with grand corruption, fraud or misrepresentation, then a contract is invalid," he said. "Through misrepresentation or corruption, it is held that a contract is voidable. The decision of voidability can be determined by the Court. If the contract is determined to be void after the Supreme Court judgment, I don't think anything is wrong."
Mr. Jayaratne added that there could be repercussions for CEO's of the banks in question if the contracts are found to have been tainted with corruption or fraud. "The multinationals also do have their own policies governing these situations very clearly." However, he said there are different points of view on exactly what actions the Supreme Court can take on the conduct of the heads of the banks.
Informed sources said there is conclusive evidence by the Central Bank, which has been asked by the Court to probe the deals and report on the findings, that deals were improperly done and may declare it null and void. However the same sources raised the question of whether Central Bank Governor Ajit Nivard Cabraal should be involved in the process due to a conflict of interest as he was responsible for first recommending hedging to the Cabinet.
Meanwhile some legal professionals believe there could be repercussions because certain banks feel this is a sovereign default and in fact, some local banks are getting a legal opinion on this issue. An attorney, dealing in commercial law, said local banks will be required to pay the foreign banks regardless of the Supreme Court interim order and will end up in a very difficult situation. The attorney went on to add that government property might be seized in case of non payment.
On Friday, the Commercial Bank (ComBank) said that under its hedging contract agreement, it is liable to make payments of US$8.93 million to its back-to-back market risk counterparty if the suspension of CPC payments’ contracts continues. The Bank has an outstanding "WTI Crude Oil Hedging Contract with CPC" due to expire on 30 June 2009. The US$8.93 million was calculated based on Friday's exchange rate of Rs.110 and if WTI Crude Oil remains at the current price of US$48 per barrel throughout the remaining period of the contract, the statement said.
A Combank official explaining the position of the Bank said there won’t be a question of defaulting a foreign correspondent. The Court’s interim order has not restrained Combank from paying foreign correspondents, only the CPC. "The ruling, to my understanding, is only for the CPC which cannot pay for any hedging until the matter is heard properly. The interim relief was for the CPC not to lose out by paying banks but the banks will have to make good on their commitments."
He said monthly the Bank will will have to give over a million dollars and, ‘we will be paying that. There is no question of defaulting on our part. We have to keep our obligation with the corresponding foreign bank. No sane bank will default.’ Former CPC Chairman Mr. Asantha De Mel's comment at a November 10th press conference that a CPC default is akin to a sovereign default is not a matter of concern to Combank which only got involved with hedging in June 2008 because the CPC had run out of credit with Standard Chartered and Citibank, the official said.
A huge debate has erupted over Mr. De Mel's 'sovereign default' statement at the now infamous press conference which became a point of contention with the CB Governor who felt the comments were inappropriate. The issue was also raised in the Supreme Court where it was revealed by Mr. De Mel that he had been asked to make the statement by Standard Chartered. Moreover, there appears to be some dissent among different parties on the meaning of sovereign debt and if the CPC which is a state corporation would fall under the definition of the term.
'Sovereign debt' is most commonly defined as 'a debt instrument guaranteed by a government.' An Internet search of the term brought up other definitions such as 'loans outstanding of individual countries, usually negotiated by their respective governments' and 'fixed income security guaranteed by a foreign government.' A definition on a business directory website brought up the term 'government debt' which stated 'under the doctrine of sovereign immunity, the repayment of sovereign debt cannot be forced by the creditors and it is thus subject to compulsory rescheduling, interest rate reduction, or even repudiation. The only protection available to creditors is threat of the loss of credibility and lowering of the international standing (the sovereign debt rating) of the country which may make it much more difficult to borrow in the future.'