MONETARY authorities declared on Thursday the government IOUs subject to the previously announced debt buyback for $1.5 billion as exempt from the so-called tainting rule.
The exemption represents an accommodation on the part of the Bangko Sentral ng Pilipinas (BSP) with respect to the government-issued IOUs now in the hands of investors, principally banks and other types of financial institutions, without which the ongoing debt buyback should prove complicated and defeat the government’s aim of retiring old and expensive debt notes with newer but comparatively cheaper new ones.
The debt buyback was announced only on Monday by the Department of Finance (DOF) and set to be completed by today, Friday. The debt exchange offering primarily involves the exchange by banks or financial institutions of their investments in existing government bond securities for new government bond issues.
The declared exempt status of bonds under the debt buyback program sends the signal that the BSP supports in full the ongoing effort by the DOF to recall or retire old and presumably expensive IOUs with new ones that do not cost as much to taxpayers in terms of interest costs down the line.
Under regular circumstances, banks that take away particular notes or bonds from a pool of government securities have to declare or reclassify the entire portfolio from held-to-maturity to either held-for-trading or available for sale on account of the tainting rule which says the sale or transfer of any part of that portfolio contaminates the entire portfolio.
This “tainting” effect is a global practice and meant to prevent banks from taking advantage of changes in the price of government securities as traded in the markets and conveniently reflect these in either their income or in their capital accounts.
The BSP said for the tainting rule exemption to be granted, the banks or financial institutions need proper documentation on their liability management transactions with the DOF or the national government.
This ensures only those eligible bond holders who participate in the government initiative benefit from the regulatory relief.
According to the BSP, with the tainting rule lifted in the case of government IOUs covered by the debt buyback transaction, bank and financial institution participation in the same is optimized.
