Tropical Heat At Citibank

Debt issued by Panama is a tiny slice of the huge less-developed-country (LDC) debt market. But lately, it has accounted for a good portion of the fireworks--including allegations of questionable trading.

Fireworks are not uncommon in the LDC debt market, which can be highly volatile and acutely susceptible to the rumor mill. The Federal Reserve and the Manhattan district attorney recently began checking into possibly improper trading practices (BW--Mar. 15). Oversight of the market, while strengthened over the past two years, remains fragmented, and the laws and regulations governing trading sometimes are fuzzy.

Panamanian debt is part of the market for "exotics," the debt of small countries, in which trading is especially illiquid and subject to wild price swings. The untamed nature of the Panamanian debt market was painfully apparent to traders in late April, when prices rose nearly 10%, only to fall more sharply as speculation about the favorable outcome of debt-restructuring talks between Panamanian officials and the country's creditor banks proved incorrect. Some traders still are licking their wounds. And they're pointing accusing fingers at one LDC debt trader, Shankar Narayan, then with Citicorp. As first reported by Reuters on May 3, Citicorp appeared to be one of a few banks "in the forefront" of the price move. Citicorp also led the group of bank lenders in the Panamanian debt negotiations, and some traders suspect that information from the talks leaked out to debt traders. Both Narayan and Citicorp vehemently deny any wrongdoing.

UPSWING. Market prices for Panamanian debt began to rise last month, as LDC debt traders awaited an Apr. 20 negotiating session between Panama and its creditor banks. Traders hoped Panama, which owes billions to foreign banks and other creditors, might soon resume making interest payments on its debt. With the market anticipating good news, the country's unrefinanced debt--the portion of the debt that has not been renegotiated with Panama's creditors--opened for trading on Apr. 16 at 33 3/8 on the dollar, according to Swiss Bank Corp., and rose during the day. The price continued to climb gradually on Monday, Apr. 19. Late that day, a wire-service story flashed on traders' screens. Citing an unnamed Panamanian source, the story said the Panamanian government "will announce this week that it intends to resume partial interest payments `sometime in the near future."'

On Apr. 20, Panamanian debt prices rose again. The next morning, the unrefinanced debt was trading around 35 on the dollar. "There's no cash flow coming out, so the only thing that drives [prices] is stories" about the prospect of interest payments and the like, says Peter N. Marber, a director in the emerging-markets trading and finance group at Swiss Bank. "You buy the caterpillar hoping it'll turn into a butterfly."

Unfortunately for buyers of Panamanian debt, the restructuring talks accomplished little. When the talks' outcome was reported by news-wire stories late on Apr. 21, Panamanian debt prices fell. By Apr. 28, the debt was trading as low as 29 3/4 on the dollar. "It was kind of wild and woolly there for a couple of days," says Timothy L. Grozier, a manager at Tullett & Tokyo Forex Inc.

Rumors began swirling that Narayan had been selling Panamanian debt on Apr. 21, before reports that the talks had been inconclusive. One investor recalls getting a call from Citi sometime after noon on Apr. 21, looking for a bid on one type of Panamanian debt. When the investor quoted a price close to 35 on the dollar, the Citi trader, the investor says, took the offer and sold the investor debt with a face value of $2 million. Other investors and traders recount similar stories. "Everyone was asking each other what the hell was going on," says one. Narayan left for a vacation soon afterward. After returning on May 3, he announced he was leaving Citicorp for another position. Sources say he will probably go to Banco Santander, where he will join his former boss at Citicorp, Hari Hariharan.

STRICT RULES. Both Narayan and Citicorp emphatically say there was no improper trading. "I clearly and unequivocally deny all allegations in the market," says Narayan. "If people are upset, it is because they are worse traders than I." And the Citicorp spokesman says the bank carefully checked Narayan's trading records and found nothing improper: "We have investigated the allegations and found no substance to them."

There is no evidence that Narayan had access to privileged information about the restructuring talks. Citicorp has strict rules constraining debt traders' personal trading activities and limiting interaction between traders and debt negotiators. And Narayan certainly had access to plenty of public information that could have made him decide to sell Panamanian debt before other traders did. For example, it's public knowledge that Panama will hold elections next year, and experts say countries don't often commit to a debt restructuring with an election on the way. As for Narayan's departure, the Citi spokesman calls the timing "entirely coincidental. We're sorry to lose him, and we wish him well."

The price of Panamanian debt has recently stabilized at around 30 on the dollar. But that's small consolation to the LDC traders for whom Panamanian debt proved to be just a little too exotic.

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