As most of us are aware the government controls the media both directly, through Temasek’s ownership of MediaCorp, and indirectly, by its power to appoint the senior management and the editors of SPH or any newspaper company under the Newspaper and Printing Presses Act.

Thus when we read a report about a political case like the IMF loan suit we can be sure that we are getting instructed in the way the government wants the result to go. Usually the objective is to give precedence to the government’s arguments and by doing so to give the public the impression that no sane and reasonable person could not agree with their interpretation of the legislation. While maybe not technically contempt of court it strays a long way from balanced reporting.

In the IMF loan case the Today report on the hearing on 20 September (  http://www.todayonline.com/Singapore/EDC120921-0000051/No-open-hearing-on-Spores-loan-pledge ) starts with the use of the emotive term “thrown out” to describe the court’s dismissal of our application to have the hearing moved to open court. The effect is to try and give the impression that our suit is frivolous and has no grounds. While it may not be “ordinary practice for application for leave to be heard in open court”, as Today put it, I felt that there were enough issues of importance to Singaporeans to warrant the case being held in open court. At least Singaporeans would have been able to attend and hear the arguments rather than have them filtered through the State media.  It may be ordinary practice but that is in democracies where there is a free media and certain standards of objective reporting. In particular newspapers in those countries would have to grant me the right of reply which is denied me by the State media here.

The State media carried little of my case apart from a brief comment from me when I was doorstepped outside the courtroom after the hearing. The ST reported me as saying that the case was about accountability and my right as a citizen to question the use of our monies. The breach of the Constitution and the fact that the Auditor-General had already agreed with my interpretation of Article 144 was not mentioned. This was in the case of the issue of a promissory note to the International Development Association by MOF which did not receive the President’s approval. MOF apologized. They blamed it on a junior officer in the MOF and retroactively obtained the President’s concurrence.

In order to counteract the impression which might have been given in the state media that we had no answers to the government’s defence, I will rebut their arguments here.

Today: The Attorney-General, represented by Senior Counsel Aedit Abdullah, argued in his written submission that the purpose of Article 144 is to capture transactions which increase the financial liability of the Government or lead to a drain on its past reserves.

The government is arguing that a loan is an asset and therefore does not increase the liability of the government. However it is absurd to argue that a loan is without risk, however good the credit standing of the borrower. As we know from the sub-prime mortgage crisis, billions of AAA rated collateralized mortgage obligations subsequently proved to be worthless and had to be completely written off. Many banks in the UK and the US as well as major insurance companies like AIG would have gone bankrupt were they not rescued at considerable cost to their taxpayers. These assets were rated AAA by the same agencies (Moodys and S&P) that have given the IMF a AAA rating. I have said in my affidavit that I am more concerned with general principles than with the IMF per se but even the IMF is dependent on its member governments for support. Our loan commitment to the IMF is likely to be drawn down only when it has exhausted its other resources. At that point it is theoretically possible that the IMF may no longer be considered AAA. These extra resources are targeted at the Eurozone countries that are in a vicious downward spiral of austerity to try just to get to budget balance let alone to a surplus situation where they can begin to think about servicing their debts. At some point the population will decide that they are better off defaulting on their debts. No wonder a British Conservative MP characterised his country’s 10 billion pound contribution to the IMF as like taking the money and throwing it in the nearest rubbish bin (http://www.guardian.co.uk/politics/2012/apr/21/george-osborne-10bn-funding-imf). Even though the British government did not need a vote, because it had already got approval for an increase in Britain’s IMF contribution some time back, the Opposition still accused it of running scared of parliamentary scrutiny.

Tharman makes much of the IMF’s protected creditor status which means it ranks first for repayment in the event of a bankruptcy. However how does one liquidate a country should it decide to default on its debts? Also in order to get the private sector to commit new money to these countries and existing lenders to play nice and roll over their loans into virtually perpetual obligations the IMF, like the ECB, is likely to have to give up its preferred creditor status.

The government makes much of the fact that the IMF will pay interest on Singapore’s loan should it be drawn down. However the only way these Eurozone countries can pay interest to the IMF at the moment is likely to be through new loans given that they are still some way even from basic balance before debt service costs.  Spain for instance ran a deficit of over 9% of GDP in 2011 and will have one of close to 8% in 2012. The debt reduction targets are largely wishful thinking.

So the government is being disingenuously facile in its arguments that lending is an asset and is therefore without risk. The government has accused me of lacking knowledge of basic accounting. However they are either trying to mislead the court and the public or they really do lack understanding of basic risk management as well as accounting. The counterpart of an asset is always a liability and in this case the liability is the reserves which belong to the people of Singapore. If there is a loss on any loan by the government then that will have to be charged off first against the current surplus and then against the reserves. Similarly borrowing increases liabilities but the funds borrowed would show up on the asset side of the balance sheet if they were invested and not spent. If the government is so worried about liabilities then why does it continue to borrow so much from CPF presumably to be invested in GIC and Temasek?

It seems axiomatic that borrowing is less risky than lending and therefore it is inexplicable why Article 144 should be interpreted as allowing the government to lend recklessly with no controls while borrowing needs Parliamentary and Presidential scrutiny. Surely the presumption must be that we want tighter financial controls not looser.

Also how is a guarantee qualitatively different from a loan commitment? A guarantee is like a put option in that the guarantor will be obliged to pay out in the case of some trigger. Usually then it will become an obligation of the guarantee against whom the guarantor can proceed for repayment. Singapore’s loan commitment to the IMF should similarly be treated as a derivative since it is an option that the IMF has the right to exercise. The US Federal Accounting Standards Board requires loan commitments to be marked to fair value in certain circumstances. If the credit deteriorates then this would require the institution concerned to establish a reserve for the potential loss on the liability side of the balance sheet.

Today: It would be an “absurd construction and impractical way” for the Government to function should the Article be engaged when loans of any amount are given, he said, adding that the issue had also been dismissed by Parliament previously.

However, as far as I have been able to discover with my limited resources, the loans that the government gives out are as part of programmes established through the Budget and on which Parliament has voted in the form of a Supply Bill. Otherwise they would be ultra vires. Subsequently the President will have given` his approval. For example in 2009 Parliament approved the setting up of the Bridging Loan Programme and the enhancement of the Micro Loan Programme as well as the Local Enterprise Finance Scheme. There is the Tuition Fee Loan Scheme which was set up in 1991 by Parliament. In any case these schemes are more in the nature of guarantees since private financial institutions provide the funds and the government bears 80% to 90% of the risk in return for being paid a fee.

The government has maintained that Article 144 only applies to guarantees and not to loans given. Article 144 makes no mention of the quantum of the guarantee or loan. Is the government now saying that it is an “absurd construction and impractical way” for Article 144 to be engaged when guarantees of any amount are given?

The AG argued that the question had been dismissed by Parliament in 1997. However that was the opinion of the government’s own legal officer, the former CJ Chan Sek Kheong and upheld by the Minister of Law. It was never challenged in the courts. It would be a sad day for accountability and the rule of law if the government were allowed to have unfettered discretion in the interpretation of the Constitution and they were not to be subject to the jurisdiction of the courts.

Today: Mr Aedit also said that the verbs “given” and “raised” used in the Article are specific to each financial instrument described and are not to be used interchangeably.

But Mr Jeyaretnam’s lawyer, Mr Louis Joseph, said in a written submission that “a literal and dictionary reading” of the Article would “lead to no other conclusion”.

Quite right. Not only a literal and dictionary reading but any reasonable argument from a risk management and control perspective can lead to no other conclusion.

Though not mentioned in the newspaper article there were two other arguments that the government deployed.

 One was that the monies for the IMF loan would not come from the government but from the MAS.

That is patently absurd. MAS is a Schedule 5 company wholly owned by the government which is only able to operate because the government guarantees its obligations. Its chairman and board of directors are appointed by the government. In 2009 the government was forced to inject $16.9 billion into MAS because of losses during the previous year. The resources that the MAS uses in its foreign exchange operations come from the S$ that the government deposits with MAS so it is not right to say that the resources for the MAS loan will not come from the Government Budget. Indirectly they do as it is only because of its persistent surpluses that the government has S$ to deposit with MAS.

The other argument was that I did not have locus standi to bring the action as I do not have sufficient interest in the IMF loan and I had not suffered or was not likely to suffer any loss from it

As a non-lawyer I am not sure I am qualified to comment. However courts in the UK have generally been interpreting the sufficient interest requirement liberally. To quote Lord Diplock:

“[i]t would…be a grave lacuna in our system of public law if a pressure group…or even a single public spirited taxpayer, were prevented by outdated technical rules of locus standi from bringing the matter to the attention of the court to vindicate the rule of law and get the unlawful conduct stopped.” (http://en.wikipedia.org/wiki/Standing_(law)#United_Kingdom)

I would hope that the judge will reject the defence’s locus standi argument here.

As I have said before, the reason for the suit is about the general principle of the government’s accountability to Parliament and the Constitution rather than with the merits of the IMF loan as such. In 1997 the PAP government took refuge behind a technicality to avoid accountability. It would be a shame if this were to be allowed to happen again particularly as their arguments are so weak. Whatever happens, the State media have already made a ruling for the government appear a foregone conclusion.

Published by kjeyaretnam

I'm a Singaporean economist who became an opposition activist. I blog to provide an alternative to the porkies that the Pinkies tell. It just so happens that my alternative is the truth. That's why I've never been sued in any civil or criminal court no matter how hard hitting my criticism. I'm quoted and interviewed and asked to speak across the world but largely censored in Singapore in an effort to silence my political opinions. The left hate me because they think I split their vote and because I eschew their outmoded economic models. Models that don't work. The Right and the Conservatives hate me because I'm a liberal. I'm not sure what the middle think of me. I don't think there are more than a handful of people in the middle, here in Singapore. I'm a Singaporean born and bred, dual heritage, my parents Singaporean established here before the State of Singapore was created. I'm not Eurasian. I read economics at Cambridge and could be broadly described as from the Keynesian school but I believe in interventions. I was formerly a successful hedge fund manager. After economics and politics my greatest interests are history, film and Makan. I run but I run so I can eat like a Singaporean. View all posts by kjeyaretnam