Stabilisation bonds to mop up $55 billion

Dumisani Ndlela



BANKING institutions were this week preparing for the worst as forecasts indicated that financial stabilisation bonds created by the central bank were li

kely to plunge the money market into deficit.


Financial institutions were likely to splurge about $55 billion on the bonds, a situation market watchers said was likely to expose them to huge borrowings from the central bank at rates in excess of 600%.


Gono, who a few months ago drastically reduced statutory reserve ratios for financial institutions after key sector players indicated they were facing imminent collapse due to a combination of the high statutory reserves and accommodation costs, this week introduced the financial sector stabilisation bonds “to ensure that the financial sector further strengthens its medium to long-term position”.


He also raised the accommodation rates from 300% to 500% for secured lending,and from 350% to 600% for unsecured lending.


Evidently warning financial institutions to expect payment of hefty interest on central bank loans, Gono said the upward adjustment was not contestable in terms of the in-duplum rule, which states that interest on a loan should not be higher than the principal debt.


“We discourage any bank intending to contest this issue from borrowing from the central bank,” Gono said.


Financial institutions have until Monday to comply with the central bank’s requirement compelling them to hold a prescribed amount of stablisation bonds on their balance sheets.


Gono said the holding thresholds for the bonds would be determined by an institution’s balance sheet size as at September 30, 2006.


Commercial banks are expected to hold bonds amounting to 10% of their balance sheet sizes, while merchant banks will hold 7,5%, finance houses 5%, buildings societies 5% and asset management firms 2,5%.


The bonds will bear a five-year tenor.


“This appears to be a statutory reserve in disguise,” a market commentator said yesterday.


Dealers said indications were that a number of financial institutions were likely to seek recourse from the central bank’s accommodation window to meet prescribed bond holding thresholds.


Rates began firming during the week in line with the new policy adjustments.


Dealers were quoting seven to 14 day investments at between 75% and 100%, from an average of 15% before the adjustments.


Thirty-day investment rates firmed to between 125% and 150%, from an average of 25%.


“We’re likely to see a bigger (rates) response on Monday,” a dealer said, indicating that the market, which was in surplus to the tune of $3,3 billion yesterday, was expected to plunge into shortages on Monday when subscription to the bonds mops up market liquidity.


Maturities this month are expected to amount to $50 billion, just below the $55 billion expected to be taken up by the central bank through the new bonds.

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