Dented sovereignty?

By the time this goes into print, the government will have three days left to respond to the four Independent Power Producers of the country that have asked the government to pay them their dues.
Ideally, and given that reportedly the prime minister secretariat has been urged to do the same, the payment might be made today. Then again, knowing the antics of the government, one can never be too sure.
The four IPPs, namely Atlas Power, Liberty Power, Nishat Chunian Power and Nishat Power wrote separate letters about seven days back, notifying the government that it must pay their respective amounts originally due from Pepco.
If the government doesn respond positively to the notices, then legally the IPPs will be well within their rights to call on the government guarantee. There could be major consequences if the government defaults on these.
These consequences may range between negative repercussions on export/imports and the opening of LCs, negative credit rating, dampening of foreign investor confidence apart from creating hurdles for the upcoming transactions like that of OGDCs bond issuance.
While all this is unlikely to happen, as the amount in question (Rs 16 billion) is not that big; the fact that the IPPs have threatened to invoke government guarantee is an eyebrow raising factor. The calling of a government guarantee is supposed to be an absolute measure of the last resort for any big business and increases the risk perception of the government.
Such is the importance of sovereign guarantees that when Hubco threatened to call upon government guarantees a little more than a decade ago, the International Monetary Fund ensured that Hubcos issue be resolved first before it released its then-pending tranche.
The government can naturally ill-afford to adopt delay tactics at a time when some key transactions are in the pipeline, and its risk perception is already high with banking circles.
Banking sources say the governments quasi fiscal financing for commodity operations is being charged an interest rate of Kibor plus 150-200 bps whereas big businesses like Nishat are being charged Kibor plus 100 bps. This in itself is evidence of the fact that the governments theoretical perception as the safest borrower has been dented.
In fact, the market perception of the governments bond borrowing risk is weakening by the day as the government is raising more and more debt directly and indirectly, with the fiscal deficit seen at 8 percent of GDP, if the quasi fiscal borrowing is also included. And with an increase in rollover risk in government treasury papers, the day may not be far when the banks start charging a small premium on it.