Sri Lanka has launched another $1,000m bond, the fourth international bond since 2007.
The issue is being managed by Bank of America, Merrill Lynch, Barclays Capital, HSBC, and Royal Bank of Scotland. Some of the banks: Bank of America, Barclays and Merril Lynch are new entrants to Sri Lankan bonds, the weaker market conditions overseas probably necessitating the larger number of players.
What is interesting is the absence of China.
China is the government's lender of choice, politicians are constantly touting the virtues of easy credit from China which goes hand-in-hand with political support at tricky international forums. The Chinese lend freely and ask no questions, a borrowers delight.
Yet, when it comes to raising bonds, the government turns to the hated West. Western banks are used and the bonds expected to be sold in the US, followed by Asia and Europe. True, they have not included the banks involved in the oil hedging deal (Citi, Deutsche and Standard Chartered), but these banks (except Citi) never bid to manage the sovereign bond issue anyway.
So, why turn to the West? Expertise? Certainly, these banks are used to structuring and marketing these products but why pay fat fees to banks and incur all the costs of international roadshows when we could simply issue bonds direct to our friend China?
Could it be that China is not particularly interested in these bonds?
China is now this country's main creditor, but the bulk of the lending is project based - for infrastructure, highways, ports, power plants and the like.
The Chinese loans are tied, meaning that the projects need to use Chinese raw materials, (steel, cement etc) and even a fair component of Chinese labour. The proportion of local value addition in these projects is a great deal less than in projects involving international lending agencies.
Thus China earns a return on its loans both in the form of interest (at commercial rates, unlike the subsidised rates offered by lending agencies) and profits on the raw material sold to the project. These projects are therefore a lot more profitable than subscribing to a straightforward bond. It may also be more secure - I do not know if the project assets are mortgaged to the Exim bank (the main lending arm the Chinese) but it is a possibility. Apart from return and security there is another reason why they may not wish to subscribe.
The Government has to have a 'story' to sell a bond and merry tales of reconstruction and infrastructure can be spun. The story only has to be believable to in order to sell, no one really monitors if the money is spent in that manner. What actually happens is that the much of the funds are used to pay interest, roll over existing debt and pay for salaries and other day-to-day expenses.
In terms of an ordinary household, the country is not borrowing to repair the roof, extend the house or buy a labour saving device like a washing machine. We are borrowing in order to buy our food and pay our living expenses, not to invest.
Perhaps the Chinese are willing to finance our infrastructure, at a price, but they may be less willing to finance our consumption, leaving that task to the international banks and bondholders.
As long as the debt is serviced, ultimately from taxes raised from the populace, the banks and bondholders will have no problem but the first sign of trouble will see them flee to the exit, probably sending the rupee to free-fall.
Update: The bond was sold at 6.25%, compared to US treasuries which are currently at 2.96%, full story here.