The government of Malaysia has a huge debt, estimated at over RM200 billion. The corporations of Malaysia also have a huge current debt, much non-performing. Over the past two years these debts have been increasingly converted to long term debt, some as far out as 25 years.

The Malaysian government has encouraged this swapping of debt in its commitment to assist in the restructuring of favoured businesses which have fallen on hard times. The government does not like to see any business fail. "All businessmen are my cronies," says the prime minister. So the government assists wherever possible, usually by transferring corporate debt to the Malaysian public.

The government (through the ministry of finance) is itself a major player in the Malaysian economy, holding and managing large blocks of listed stock for the public. The major asset of the country is the national oil company, Petronas. It is not a public corporation and does not make routine reports of its operations. Though nominally managed for the public, it is treated as the private property of the prime minister.

Restructuring in Malaysia is tardy, unusual in its inability to accept and declare a loss. Instead of selling off the dead wood and refinancing what is still profitable, as is taught in management schools, Malaysian corporations, encouraged by the government, hang on and on, letting the losses mount.

Bankruptcy proceedings are staved off by selling new paper in the form of rights and warrants, diluting the existing shares by selling new ones, and now and then listing any operations still profitable on the stock exchange as though they were new and viable entities in a effort to inject new blood into a decadent enterprise. A recent wrinkle has been the invention of dotcom internet shell corporations, providing humour (and sadness) to the market in what looks like a mid-court shot at the basket in the closing seconds of a basketball game in a desperate effort to beat the final horn.

Non-performing bank loans magically become "performing" loans again by re-defining them and extending the time before declaration. The more hopeless debts are shuffled to a government-funded salvage operation. But the losses are not always taken off the books ... the government is allowing them to be written off over a period of years.

The sale of bonds is a prudent financial choice for the Malaysian government. It controls the base lending rate. In other countries the base lending rate is determined by independent bodies, but in Malaysia it is controlled by the federal Bank Negara, which is controlled by the government.

The ministers of the present government of Malaysia are inveterate gamblers in the larger sense. They have not learned much from mega-losses in the tin market, the currency markets, the steel market, the banking business, and the automobile market, just to mention a few. There is still a supreme confidence that with absolute control of the public purse it will be possible to corner or manipulate any market of interest. Repeated multi-billion ringgit failures representing decades of recovery find them unchastened, undaunted.

But this time, as the compulsive gambler says, it is a sure bet. They cannot lose. The more bonds sold, the more money to be made. Bonds sold today will fall in value tomorrow, after the interest rate is raised, and will continue to fall until the new rate matches the market. They can then be redeemed (bought back) at a much lower price. This is only true if the bonds are issued in a form that allows the seller the option of early recall. These bonds are known as "callable" or "redeemable" bonds. Malaysia is selling this type of bond almost exclusively.

If the government of Malaysia were seen by the international bond market to be selling bonds as a deliberate fraud, it would be difficult to sell Malaysian bonds to anyone but a simpleton. At the moment there does seem to be a good market for Malaysian bonds, both corporate and public, though the coupon (the interest rate offered) is two or more percentage points over the market rate for bonds of stronger issuers. The Malaysian bond rating agency gives high ratings to Malaysian bonds.

Why is the sale of redeemable bonds such a sure thing? Simply because the Malaysian government has already announced that it is going to remove its subsidy for petrol at the pump. The government says day and night that this is not inflationary.

But when prices go up it is inflation. The RM50 note in your pocket is not enough to fill the tank anymore. Now you must pay RM55 or even RM60 for the same amount of petrol. The ringgit doesn't buy as much petrol as it did before. The ringgit is worth less than it was, at least in the petrol purchase. When inflation is intense a lorry load of notes is necessary to top the tank.

When the money in your pocket won't buy as much of the same thing as before, that is inflation. The money in your savings account buys less. You have suddenly become poorer. The government can say the petrol price increase is not inflationary, but they are not going to be there when you pay to fill the tank.

In Malaysia the government fixes the price for basic food commodities. These have not gone up ... yet. But if vendors cannot deliver at the fixed price economically, they will tend to withdraw the commodity until the price does go up enough to provide a proper profit. This is a basic supply/demand relationship and is beyond government control.

The government has allowed the tolls to be increased. The bus fares are increased. The air fares are increased. There is mounting pressure for further increases in all areas of the economy. So inflation is a certainty. And with the inflation there must be an increase in interest rates, because people won't lend their money if there isn't a suitable spread between the interest rate paid on savings and the national inflation rate.

Bonds are sold with a contractual agreement that the principal amount and the interest will be paid in a specified currency. Thus there is a foreign exchange risk when holding bonds of other countries. The ringgit, however, is now pegged to the US dollar, and will remain so until it may please the Malaysian government to remove or revise it.

Because the government has the power to change this rate at will, it threatens the price of Malaysian bonds now held by other countries. The Malaysian government thus can change the rate in a direction and at a time favorable (profitable) to them.

Every day new Malaysian bonds are offered for sale. Every day the Malaysian government reaffirms that the peg will remain. Every day the Malaysian government insists there is no inflation. Would the Malaysian government lie? The amount and date of the petrol price increase has not been announced. It will be announced when no more bonds can be sold.

Thus the sale of Malaysian government and corporate bonds is a certain winner for three reasons: the announced inflation, the ability to increase the base interest rate, and the power to set the peg. This time the government gamblers have got it right.

Who will buy Malaysian redeemable bonds? The Western capitalists are the first choice. Western fund managers shop for Asian stocks and bonds to fill a quota. Other prospects are the Malaysian public, the public unit trust funds, local banks and insurance companies, mutual funds, and the EPF.