The Dean of University of Cape Coast School of Business, Prof. John Gatsi has warned the country will experience another round of bank sector cleanup if care is not taken.
Prof. Gatsi raised this red flag in an article posted on his Facebook page responding to government announcement on the debt exchange program.
According to the economist, the “Debt exchange program is default announcement and a call for support to resolve debt servicing burden by government.” but was quick to add that “This does not in anyway taken away the solemn and legal commitment to pay principal at maturity and also pay periodic coupon to the bond holders.”
“This legal obligation or covenant is such that the debtor (government of Ghana) is still a debtor whether there is cash flow / revenue challenges or not.” – the lawyer explains
For him, “The fact that government has declared default does not mean government has triggered a different status for itself. Government is still a debtor” emphasing that “The Ministry of Finance is not a court to determine that individual bond holders will not get favorable judgment in any legal action especially when the process was described as voluntary.”
“In a democracy, individuals bond holders are at liberty to go to court. The court has the choice to determine whether or not people should be scared about government and her debt instruments going forward. Government indeed needs the support of bond holders in the debt exchange program but the critical question is whether government should determine what it wants and not a negotiated deal.” – He explains
“The challenge now is that government debt restructuring in a high interest rate regime, may trigger a certain percentage of default by private sector debtors such as households, micro, small and medium size enterprises . So we await a boom in the non- performing loan portfolio of banks soon with reclassification of assets with huge assets expected for impairment. This will create liquidity and capital challenges. We are in for another round of bank sector cleanup if care is not taken.” – He added
READ HIS FULL ARTICLE:
Bond holders’ action in debt exchange program: a call for trustworthy participation —prof.John Gatsi
Debt exchange program is default announcement and a call for support to resolve debt servicing burden by government. This does not in anyway taken away the solemn and legal commitment to pay principal at maturity and also pay periodic coupon to the bond holders. This legal obligation or covenant is such that the debtor (government of Ghana) is still a debtor whether there is cash flow / revenue challenges or not.
The debt exchange must be negotiated fairly for bond holders to accept the difficulties government is facing to share part of the burden with government. If this is not done then the entire process becomes hostile . The exercise should be fair to the financial system in general to foster a negotiated debt exchange program and this will keep bond holders still trusting government. Everything must be done to maintain investor confidence to achieve trustworthy and credit worthiness of government instruments along the long term path.
The fact that government has declared default does not mean government has triggered a different status for itself. Government is still a debtor. The Ministry of Finance is not a court to determine that individual bond holders will not get favorable judgment in any legal action especially when the process was described as voluntary. In a democracy, individuals bond holders are at liberty to go to court. The court has the choice to determine whether or not people should be scared about government and her debt instruments going forward. Government indeed needs the support of bond holders in the debt exchange program but the critical question is whether government should determine what it wants and not a negotiated deal.
The challenge now is that government debt restructuring in a high interest rate regime, may trigger a certain percentage of default by private sector debtors such as households, micro, small and medium size enterprises . So we await a boom in the non- performing loan portfolio of banks soon with reclassification of assets with huge assets expected for impairment. This will create liquidity and capital challenges . We are in for another round of bank sector cleanup if care is not taken. Let us protect the financial sector and our banks. Already, banks generally are not allowed to pay dividends to shareholders on accounts of regulatory directives.
The debt exchange program should be done in such away that it does not affect the credit lines of banks , limit access to credit by the private sector and finally restore confidence and trust that is able to reconstruct the capital market and creditworthiness of government instruments.
By Efo Korsi Senyo / awakenewsroom.com