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Sri Lanka’s opposition party claims central bank repo with New York Fed is illegal

ECONOMYNEXT – Sri Lanka’s United National Party of ex-Prime Minister Ranil Wickremesinghe has claimed that a repurchase deal between the central bank and the New York for short term liquidity is illegal without parliamentary approval.

“Under our constitution Parliament is vested with the control of public finances, the monetary law does not make specific arrangements for this repurchase agreement,” UNPs Deputy General Secretary Ruwan Wijewardena said in a statement.

“Firstly the government must come to Parliament and make provisions for the repurchase agreement, this will also provide them with the opportunity to explain to the country the need for such an arrangement.”

The statement also questioned which assets would be pledged and the price and what would happen if Sri Lanka defaulted.

The central bank in a statement had said a billion US dollars of US Treasury bonds would be pledged and the price would be 0.35 percent per year – the sale price and repurchase price would involve the difference in the interest.

The central bank said the repo is overnight (for one day) and has been made available to foreign and international monetary authorities by the Fed and allows the central bank to get dollars for short term needs without having to sell US Treasuries outright.

The facility has not been used.

“This facility enables a Central Bank to secure short-term funding when needed, without having to make any sudden structural adjustments to its long-term investment portfolios in foreign exchange.”

Fed also has longer term facilities to larger central banks running up to 28 days.

EN’s economic analyst Bellwether says the overnight repos effectively extends Fed’s overnight monetary operations beyond the borders of the US. In 2007, the Fed opened its 28-day term auction facility (term reverse repo auction in Sri Lanka parlance) to outside parties.

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The US Fed also has swap lines with the larger central banks of the world which helps spread the hegemony of the US dollar in global financial markets, analysts say.

The Fed swap lines emerged in the 1960 in part due to the policy errors involving targeting an output gap that led to the collapse of the US dollar and the Bretton Woods system in 1971 sending gold prices sharply above 35 dollars an ounce ending convertibility.

Swaps were were also used to inject dollars and smoothen Euro dollar rates spikes in the late 1960s, in an issue not directly linked to Fed policy errors.

There was no specific Congressional authority sought. In 2007 as a massive housing and commodity boom fired by Fed’s ‘mother of all liquidity bubbles’ started to collapse, the swap lines became open ended.

Again no specific Congressional authority was sought. The legal basis for Fed swaps has been questioned.

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The Federal Reserves questionable legal basis for central bank liquidity swaps

Members and others have shown that Fed swap lines undermine the authority of the Congress over finances particularly after a bailout of Mexico, which involved a joint operation with the Treasury.

Sri Lanka’s central bank is now giving credit guarantees to loans, which is the responsibility of the Treasury.

Swap lines have come under opposition from within the Federal Reserve system including from Governors from the St.Louis and Richmond Feds, which have historically pushed for prudent policy to avoid crises rather than deal with the after-effects, analysts say.

Sri Lanka’s central bank now also engages in swap operations with commercial banks not just to provide liquidity, but also to bump up forex reserves.

Operations of central banks are a mystery to most members of the public, and the poorest pay the ultimate price in currency collapses, inflation and lost real wages. Their assets may also be re-possessed by banks as demand collapses along with the currency. Members of the public may also be hit by import restrictions after money printing.

Sri Lanka’s central bank has extensive powers under its monetary law also set up by an expert from the US Fed, with their effects barely understood even by those who study it closely.

Following recent money printing by the Fed gold has risen to 1900 US dollars an ounce, historic high overtaking the 1,700 dollars during quantity easing exercise.

Originally central banks did not have the power to destroy or float currencies (end convertibility) without specific parliamentary approval. The Bank of England had to have specific parliamentary authority (Bank Restriction Act) to float (deny convertibility) after printing money.

US activists have also argued that the Feds float in 1971 (and the Fed itself) is un-constutional as the Congress was required to ‘coin’ money in the wake of a debacle with the Americas paper Continental dollar.

The Fed operates generally under a legal precedent set in the so-called McCulloch vs. Maryland case involving an earlier central bank, which was later shut down over the damage it caused to the people and corruption. (Colombo/July29/2020)