Will a $3bn bailout be enough for Sri Lanka?

This is an audio transcript of the FT News Briefing podcast episode: ‘Will a $3bn bailout be enough for Sri Lanka?’

Marc Filippino
Hey, guys. We’re gonna get to today’s briefing in just a second. But first, I wanna tell you about FT Edit. It’s an app for your iPhone and iPad that gives you access to eight of the FT’s best stories hand-picked every weekday. The app’s editors serve up a perfect mix of politics, business and global news from our award-winning journalists, plus opinion pieces from our top columnists. The best part, you can try FT Edit today completely free for 30 days with no obligation. Just head to the show notes for the link. Good morning from the Financial Times. Today is Tuesday, March 21st, and this is your FT News briefing.

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The International Monetary Fund is handing Sri Lanka a major bailout. And while banking troubles are starting to cool down in the US, First Republic Bank is still feeling the heat. Plus, the FT’s Katie Martin tells us why the deal for UBS to buy Credit Suisse is leaving some bondholders high and dry.

Katie Martin
This has been a very big shock to people who really know their stuff.

Marc Filippino
I’m Marc Filippino and here’s the news you need to start your day.

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The International Monetary Fund approved a $3bn bailout for Sri Lanka yesterday. The country had been dealing with a mismanaged government for years, and the war in Ukraine led to soaring inflation and shortages last year that threw the country into a crisis. So will the money from the IMF help?

Jonathan Wheatley
$3bn itself won’t do very much at all.

Marc Filippino
That’s the FT’s Jonathan Wheatley. While the dollar amount of the bailout won’t do much, Jonathan says it will get the ball to recovery rolling.

Jonathan Wheatley
It gets them on the road we hope, to resolving, you know, 90 or $95bn worth of debt. Sri Lanka just isn’t generating enough revenue in the economy to pay off public debt. That’s why the IMF comes in. So you need an IMF program which does two things. It reduces the amount of debt, but it does that in order to make those debts sustainable and put the country back on a path to growth. Because Sri Lanka can’t just default and go away, they need to go on borrowing. Not only do they need to go on borrowing to do the stuff that they’ve been really struggling to do, like paying for health and education and basic public services. Sri Lanka and a whole host of other low-income, middle-income countries, all countries around the world have huge challenges to face. So these countries need to get their debts in order so that they’re sustainable. They can go back to markets. They need affordable borrowing and they need to be able to do it sooner rather than later.

Marc Filippino
Jonathan Wheatley is the FT’s emerging markets correspondent.

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The dust from the UBS takeover of Credit Suisse is still settling, and it turns out that the deal left holders of Credit Suisse’s relatively risky debt out in the cold. $17bn worth of so-called AT1 bonds was wiped out, even though equity holders retained some value. As you can imagine, this did not go over well with a lot of people. Here to explain what exactly happened is our markets editor, Katie Martin. Hi, Katie.

Katie Martin
Hey, Marc.

Marc Filippino
So these are AT1 bonds. A as in apple, t as in tiger, one. Can you tell us a little bit about the history of AT1 bonds?

Katie Martin
Additional tier 1 debt is a special type of debt the banks issue. It’s one of the really big innovations that came out of the financial crisis in 2008. Regulators got together and said, OK, let’s absolutely buster got to avoid a situation in which depositors in banks are left on the hook if a bank fails. And so what they did is came up with this kind of a little bit like debt, it’s a little bit like equity. And it’s this kind of squidgy layer that sits in between the two of them, the banks issue that provides a cushion. The whole point of it is that it absorbs some of the shock in the event that banks get into trouble and the holders can lose money on it. The thing is, buyers of additional tier 1 debt hardly ever lose money on it. So what happened when Credit Suisse and UBS went through this shotgun wedding, equity holders, OK, they’ve lost a lot of money, but they haven’t lost everything. Whereas the additional tier 1 bond holders have been wiped. Let me tell you something. This has not gone down well.

Marc Filippino
Yeah. What has been some of the blowback to this?

Katie Martin
So there’s been lots of wailing and gnashing of teeth. There have been lots of people saying, wait a minute, you can’t just change the rules on this because of the way through the process and decide that we don’t get anything. This is a reasonable pushback. The problem is that if you look at the small print of the prospectus under which this AT1 debt has been issued by Credit Suisse, I’m not a lawyer, but it looks like they can do this if they want to. So this means that investors henceforth are going to take quite a different view around the safety of additional tier 1 paper. This has been a very big shock to people who really know their stuff.

Marc Filippino
So, Katie, the whole point of this UBS-Credit Suisse deal was to make sure that the banking crisis didn’t have a contagion effect. Could the issue with AT1 bonds actually do the opposite and keep the crisis going?

Katie Martin
I mean, I don’t wanna, you know, unfurl my mission accomplished banner too early, but it feels like this is contained. It feels like the casualties here are holders of AT1. And that feels like a reasonable kind of bit of collateral damage to the rest of the market. The rest of the market seems to be saying, well, it is in the small print, so I guess, you know, them’s the breaks, but I think there will be legal challenges. I think, you know, what we’re seeing already is regulators elsewhere in the eurozone, in the UK are saying, listen, we have AT1 there for a reason. And generally speaking, it won’t get wiped out unless the equity holders also get wiped out. So that’s kind of their reassurance to the market to say, listen, this debt still performs a function. This is still what it does.

Marc Filippino
Katie Martin is the FT’s markets editor. Thanks so much, Katie.

Katie Martin
No problem.

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Marc Filippino
First Republic Bank is still in bad shape. That’s the regional bank caught up in the fallout from the Silicon Valley Bank collapse. First Republic got a $30bn deposit from major US banks last week. The deposit was supposed to inspire confidence in the bank, but investors are still worried. Yesterday, the San Francisco based lender saw its stock plunge 47 per cent. The FT’s Brooke Masters explains why the big deposit didn’t stabilise the bank.

Brooke Masters
In a weird way, it scared people because why did they need to do that? Why did they need 30bn of extra deposit money if the bank is really stable? The thing to remember about First Republic is it had fears some, but certainly not all of the same characteristics as Silicon Valley Bank, which was the bank that started all this mess when it went down March 10th. Like Silicon Valley, First Republic has a lot of very large depositors who would not be covered by ordinary deposit insurance. So that means they’re worried about what happens to them if the world falls apart. And the other thing that’s wrong with First Republic, if you are an investor and scared, is that it has an enormous, long-dated mortgage book. This is different than SVB, but it has the same problem in that it is these mortgages, if held to maturity like all the way for 30 years, they’re fine, but on paper they are worth less right now because the Fed has raised interest rates. So if First Republic has to sell them to meet depositor withdrawals, they’re going to take big losses. So those two things are what freaked people out.

Marc Filippino
Are there other rescue plans in the works?

Brooke Masters
There’s definitely a lot of chatter. Ideally, from First Republic’s point of view, you would want somebody to put in what’s called an equity injection, ie buy more shares, because that gives them more resiliency in case they have future losses and it might reassure the market. However, if you are a fund manager or a bank putting in equity in something that might get taken over by the FDIC and therefore wipe out all of the shareholders is irresponsible. And so I think people are quite reluctant to put more equity in right now.

Marc Filippino
But could the bank get sold to prevent a collapse, kind of like what we just saw with Credit Suisse?

Brooke Masters
It absolutely is a possibility. It could get sold. It could get taken over by the FDIC and then sold. I think the question for anybody who wants to buy it is, is this problem of this mortgage book that takes losses because it is a bank. If you buy another bank, you then have to take mark to market on everything, all of its assets, ie the loans it’s made. So you would take those losses. So there’s a reluctance again to sort of get involved. I mean, First Republic is a lovely banking franchise. It’s the kind of place that if you were kind of upper level wealth but not super money, go to and get really good treatment. It’s got customers who love it. So it’s a funny thing. It’s a really good franchise. It’s just in a weird bind right now.

Marc Filippino
Brooke Masters is the FT’s US financial editor.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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