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Karmenu Farrugia wonders why there was so much interest in European Investment Bank bond and ask who is guiding Malta’s economy
Almost pathetic, reading how representatives of financial institutions spent the night camped for 12 hours outside BoV’s head office to ensure not missing out on such a prestigious and advantageous (sic) offer to the Maltese investing public from no less than the European Investment Bank (EIB). A ‘landmark’ issue: that’s how it was described by a stockbroker.
I was reminded of an occasion in the mid-fifties in London when a student colleague organised a roster of her room-mates to sit and sleep outside Harrod’s in Knightsbridge on a cold early January day and night to be the first for a one-only fur coat marked down in price to a third of its normal selling price as soon as the store re-opened for its annual ‘sale.’ The vigil was indeed worthwhile: a bargain forsooth. They would re-sell the coat and divide the profit. This week I watched with curiosity hundreds of people, admittedly in early morning, queuing at a shoe store in Pieta precisely for the same purpose: a bargain.
But the EIB bond? Was it a bargain or even a desirable thing perchance? Not to my reckoning. Definitely not in logic or business sense. As Malcolm Muggeridge once admonished, “remember, only dead fish swim with the stream.”
At this juncture the Maltese stream is overflowing with everything that is European, vying with the other nine acceding nations to please the current 15 member states at any cost, as if we have anything further to gain in doing so. To me this behaviour still smacks a bit of the colonialist mentality which we ought to have shed completely after independence in 1964 and freedom from foreign military personnel in 1979. Perhaps we needed two generations to accomplish this end, not one.
Let me briefly examine the intrinsic attractiveness, or otherwise, of the Lm 10 million EIB bond and try to understand how a 3.8 percent pa interest for 5 years, denominated in Maltese liri, was twice oversubscribed in a matter of 3 hours instead of 3 days as planned. Remember that interest rates are more likely to go up by then rather than down. And we might be in euroland by then, possibly (but not advisedly) at a discount on our currency.
First, the background. The setting up of a stock exchange in Malta has failed to attract the public’s investment in equities (full risk securities) except in privatised (even partially) companies enjoying captive markets and the security concomitant with a monopoly, duopoly or oligopoly. Apart from Datatrak and Suncrest, no firm operating in a fully competitive market has floated any share issue.
The Maltese entrepreneur does not seem to be ready yet to fall in line with the government’s declared objective of ‘popularising’ corporate ownership when launching the exchange, much derided in the seventies as irrelevant to our economic needs.
Once equities are forcefully resisted, let us at least try bonds. Second best, but better than just letting the banks remain the sole intermediaries between the saver and the economic players.
For some unclear reason we have shunned debentures although they are specifically included in the provisions of our company legislation.
The only reason I can think of is that real estate property is specially reserved for, and hypothecated in favour of, the banks, leaving no specific security for the debenture-holders. Perhaps because businesses are very lowly capitalised. Crazy, but true. As a result of this state of affairs, only bonds were floated in the main. Galore. The two exceptions turned out to be an unhappy and a flat one, enough to scare investors anyway.
Inter alia, in descending order of interest rates and all in Maltese liri: SunCrest 8.25 percent, Bay Street 8 percent, Coralia San Antonio 7.5 percent, Big Bon 7 percent, Corinthia percent; Tumas 6.7 percent, Mizzi 6.7 percent, Farsons 6.25 percent, BoV 6.15 percent, Dolmen 6 percent, Mariner 5.75 percent and International Hotels 5 percent. I deliberately leave out the Privatisation Bonds at no interest and still waiting to make some sort of earnings before maturity next year: perhaps the imminent privatisation of the remainder of shares in Maltacom? And later BoV?
How about government bonds? Gilt-edged, in technical parlance. From highest 7.8 percent yield maturing in 2018 to lowest 4.8percent maturing in 2016. By way of comparison with the EIB bond issue, government bonds maturing during 2009: a 7 percent coupon maturing July 2009 is now quoted on the exchange at 119.18, yielding currently 5.87 percent, but only 4.57 percent if retained for 5 years to maturity. Two similar bonds, maturing in March and September 2009, yield 5.5 percent and 4.39 percent respectively. All these 3 bonds are freely bought/sold on the exchange, obviously by the small investor, not the big financial institutions.
The least attractive deal at 4.39 percent is still higher than the 3.8 percent EIB bond coupon. Why then, inveigle the little man to go for it? For the prestige of it? Or because its AAA rating makes it safer than our own government? In a democratic country where all political parties are positioned in the centre field of politics as internationally regarded, should anyone harbour even the slightest fear that, like Argentina, our government could default in the next five years?
The truth lies elsewhere. Sadly it takes an economic observer to see it staring in his/her face, but unnoticed by most people or conveniently hidden from them by those whose function it is to advise them how best to invest their surplus savings - professionals with commissions to earn every time a new security is listed on our exchange, enticing investors to buy in anticipation of a tax-exempt capital gain on reselling soon after commencement of trading. In stock exchange lingo: stagging. Isn’t that what occurred when we experienced the silly ‘boom’ (?) which later busted, as predicted by objective knowledgeable economists, causing misery among many gullible small investors who fancied dabbling at speculating in imitation of the get-rich-quick ‘big boys.’
Well, the truth is that, with the privatisation of banks and especially with the advent of HSBC showing us how to make money for the shareholders without caring much for the economy, the sector has not fulfilled its economic function the way the country needed it to for its health, growth and prosperity. Witness the current state of both the money and the capital market: both flushed with unprecedented overliquidity.
And yet the business community remains parched. “Debtor-chasing has become a specialised time-consuming skill involving accountants and lawyers, at times eventually wrapped up in a barter deal,” I had occasion to state in front of an audience of businessmen last week.
I can detect the ‘politics’ of the banking sector in enticing the EIB to mop up the people’s savings on the cheap. Banks just cannot refuse deposits, can they? And more to come. Just wait and see. Possibly even at a lower rate of interest, considering the issue was gobbled up in great style, vigil and all. Come to think of it, what was the justification for extending the 15percent tax-at-source concession?
Who really is steering the economy? I am waiting with unusual curiosity for the next bond issue by the government. Will it still be higher than 3.8 percent? And will there be people camping outside the Treasury?
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