Last Resort

Feb 27, 2009 (LBO) – Sri Lanka’s central bank may open a liquidity facility as a last resort, in a bailout package for troubled finance and leasing companies which has a 4.2 billion rupee fiscal component, officials said. In recent times the Reserve Bank of Zimbabwe has used such tactics to finance agricultural sector credit and also prop-up bankrupt state entities. Most modern central banks only print money for the Treasury.

Though the international financial media routinely refers to central bank bailouts of banks as being ‘tax payer’ financed, monetary bailouts are also financed out of ‘printed money’ and are used at the cost of either inflation or currency depreciation.

In the absence of a floating exchange rate and a policy rate and open market operations system to ‘recoup’ money pumped into failed financial firms, the pain of bank bailouts would be felt more heavily on the exchange rate.

Fiscal Support

The government has also made available 4.2 billion rupees of fiscal help for troubled finance and leasing companies.

About 2.0 billion rupees will be given through Treasury bonds against unsold land in finance companies, which will be taken by the state-run Lankaputhra Bank a