Central Bank dollar investments safe as US government crisis ends
View(s):Sri Lanka’s Central Bank and other central banks in the region, heavily exposed to US treasury bonds, heaved a sigh of relief on Friday after an 18-day partial US government shutdown ended.
“We were all nerves,” noted a worried Central Bank (CB) official, saying the CB and other central banks have massive investments in US treasury bonds.
“Anything could have happened (in terms of the value of the bonds) if the shutdown continued for many more days,” the official who declined to be named, told the Business Times.
Relief across many borders was evident on Friday given that China has some $1.4 trillion worth of cash wrapped in US treasury bonds while Japan is the second largest investor with around $1.3 trillion. Closer home India has invested $59 billion (being the 20th largest investor in US securities). In the Sri Lankan case, the CB also has ‘substantial’ investments from foreign reserves (currently at $7 billion), in US securities. The official declined to disclose the amount. He said that while US securities provide the lowest interest against other financial instruments, it is the safest investment option in the world.
Banking analysts say that this is the perhaps the second occasion in a decade that caused many jitters at the local central bank over a global crisis.
Many years ago the Central Bank had sizable investments in Lehman Brothers. However a few weeks before the US investment firm collapsed, in September 2008 which triggered a global financial crisis that still reverberates across many markets, the Sri Lankan regulator withdrew its money, alerted by advisors. “That was a narrow call,” a CB official recalled at the time.
In the US, some 800,000 workers were taken off the work roll in the stand-off between political parties that forced the government into a partial shutdown from October 1.
Ratings firm Standard & Poor’s reported that the shutdown had cost the economy $24 billion, affecting services across the board.
A US government shutdown refers to a temporary stoppage in government services when legislators are not able to approve the necessary funds in time. Such shutdowns have occurred in the past in the US.
On Wednesday, the US Senate approved a measure that should end the US government shutdown and avert a potentially catastrophic default.
Both Republican and Democratic senators announced a plan that would stave off the most pressing crisis by extending the US Treasury’s borrowing authority until February 7 (2014).
After several chaotic days running up to Thursday’s deadline, the agreement would also re-open shuttered federal agencies, bringing hundreds of thousands of furloughed employees back to work, by funding government.
New laws would allow government to borrow beyond its current $16.7 trillion debt ceiling to meet its obligations.
The crisis however didn’t affect the local and foreign currency markets in Colombo where the US dollar ended at around Rs. 131.50 per $1 at the close of trading on Thursday. Friday was a holiday.
Traders said the flow of funds from the National Savings Bank’s dollar bond issue of $750 million also helped ease any pressure on US dollars in the market.
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