Bailout Program

Feb 19, 2009 (LBO) – Sri Lanka’s government will make a final decision on a bailout package to deal with toxic assets of banks and finance companies next week, government minister said. He said the first round of negotiations was held Wednesday. State-run People’s Bank has also stopped payments on hedges to counterparty banks, opening the way to trigger cross default clauses, and also heightening risk perception in the inter bank market.

Non-payment of derivatives could hurt the capital bases of state run People’s Bank and private Commercial Bank, which are independent entities.

Bubble Trouble

Sri Lanka’s property prices zoomed after prudent monetary policy conducted by the central bank from late 1994 ended in 2004 after fiscal policy also reversed.

Property prices zoomed amid artificially low interest rates, as tens billions of rupees were printed to finance runaway government expenditure and inflation zoomed above 20 percent a year, year after year.

Blatant financial repression also helped the growth of unregistered financial institutions, by attracting savings that were seeking yields above inflation.

State-run National Savings Bank, a price-mak