There is a very real possibility that the current global credit crisis will have no ‘significant direct impact’ on Sri Lanka’s economy, according to a senior Economist, Dr. Ranjith Bandara.
He suggested that this was because ‘Sri Lanka has only a minor relationship with the financial institutions that have got into difficulties, particularly in U.S.A.’ He further supported his view by referencing a recent Central Bank of Sri Lanka statement which noted that ‘the recent shock of the past and the new global financial shock has not affected Sri Lanka too adversely.’
These observations were made at ‘An Evening Seminar on Current Global Credit Crisis’, where Dr. Bandara was speaking on the potential impact of the credit crisis on Sri Lanka’s economy as well as how possible negatives could be counteracted.
The event was organized by the Merchant Bank of Sri Lanka, a subsidiary of the Bank of Ceylon allied with SBI Capital Markets Ltd of India.
As part of his exploration of the background of the global credit crisis, accountant Sujeewa Mudalige pointed to one of the root causes of the current crisis being U.S. and European banks’ movement away from reliable devices such as deposit mobilization. More recent trends such as aggregating loans and a system of credit swaps resulted in an environment where it was more commonplace for assets to be under-scrutinized and ultimately bundled together and traded on Wall Street.
He also identified other factors, all of which finally affected each other to cause this crisis, including: the transfer of risk from banks to mortgage brokers, home appraisers and ratings agencies; very little emphasis on the very real possibility of massive defaults of mortgage repayments; greater complexity of asset based securities such as Collateralized Debt Obligations (CDOs); and an unregulated environment for trading these securities which was more similar to a gambling contract than a trade.
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