BANGKO SENTRAL READY FOR U.S. DEFAULT / DEFAULT TO HIT EMERGING MARKETS
BSP Deputy Governor Diwa Guinigundo. INQUIRER FILE PHOTO
MANILA, OCTOBER 14, 2013 (INQUIRER) By Paolo G. Montecillo - Local monetary authorities are prepared for the worst, having a wide range of tools that can be deployed if the current impasse at the US Congress turns the world’s most traded security—US treasuries—into toxic assets.
The Bangko Sentral ng Pilipinas (BSP) said it remained confident that US lawmakers would not be foolish enough to let the world’s largest economy reach its legal borrowing limit, which would force it to default on some of its loans.
“It is unthinkable that the US government will not resolve this stalemate between the US executive and the legislature because market sentiment will turn against the US,” BSP Deputy Governor Diwa C. Guinigundo said. “They’re all aware of the implications of a US government not able to pay or amortize or pay back their obligations.”
In an e-mail to reporters, Guinigundo said that should the US government default on its loans, the BSP had enough tools to ensure that liquidity—or cash—keeps circulating in the economy.
This followed statements by Finance Secretary Cesar V. Purisima last week warning that a US default might have consequences worse than the effects of Lehman Brother’s collapse in 2008. “Their Congress has to realize the implications of defaulting on $12 trillion of outstanding debt, almost 23 times the $517 billion in debt which forced Lehman Brothers into bankruptcy in 2008,” Purisima said.
“Whenever there are crises like this, the first thing that gets affected is liquidity,” Guinigundo said. He said local banks have a “big” exposure to US treasuries, which are still considered one of the safest, if not the safest, investment for any fund manager.
He said that in case IOUs issued by the US government have to be written off, banks would naturally resort to preserving their cash positions. This would result in banks lending less to their clients and to one other, restricting the flow of money that the economy needed to run.
One of the measures the BSP can tap to resolve this is its peso rediscounting facility, which allows banks to exchange their receivables for cash. The peso rediscounting budget of the BSP was earlier cut to P20 billion last year from a high of P60 billion at the height of the global financial crisis in 2009.
Guinigundo said the BSP was also willing to be a “lender of last resort” for banks that need dollars to lend to their clients. These dollars would come from the central bank’s foreign exchange reserves, which reached $83.03 billion as of the end of September, good for nearly a year’s worth of imported goods and services that the country needs.
“On top of that, if there is monetary space, then we can review the present monetary stance. If we need to bring it up then we will do it, if there is scope for keeping it steady then we will keep it steady,” Guinigundo said.
Other emerging markets have already moved to address the possible effects of a US default due to the possible failure to pass legislation that would allow the US to refinance its loans.
Last week, Hong Kong Exchanges and Clearing said it now classified some short-term US treasuries as riskier assets, forcing investors to put up more of these instruments as collateral seeking new loans.
Purisima: US default to hit emerging markets By Michelle V. RemoPhilippine Daily Inquirer 4:57 am | Saturday, October 12th, 2013
MANILA, Philippines—Finance Secretary Cesar Purisima (photo) has expressed alarm over a potential default by the United States government, saying such an event will bring down not only the world’s biggest economy but also emerging markets like the Philippines.
“It is almost as if they are arguing about how to unlock a bank vault with a live bomb. If they cannot make a deal in time, it will blow up in their hands and take the world’s economies with them,” Purisima said in a statement.
On Oct. 17, the US government is expected to reach its debt ceiling of $16.7 trillion. This ceiling has to be raised in order for the US government to be able to borrow and avoid defaulting on its maturing obligations, the outstanding amount of which is estimated at $12 trillion.
Raising the ceiling, however, requires agreement among executive officials and legislators of the US government—some thing that seems difficult to reach at the moment. The US government, in fact, has shut down partially due to failure of the US Congress to pass the proposed budget amid ongoing debates on the Obama healthcare.
“The US is in a political gridlock, failing to reach an agreement over ‘Obamacare.’ However, their Congress has to realize the implications of defaulting on $12 trillion of outstanding debt, almost 23 times the $517 billion in debt that forced Lehman Brothers into bankruptcy in 2008,” Purisima said.
Citing estimates from the International Monetary Fund, Purisima said a US default could drive US interest rates by 2 percent, bring down US equity prices by 27 percent, and weaken the dollar by 13 percent.
According to estimates by the Philippines’ Department of Finance, interest rate on peso-denominated securities rise by 0.8 percentage point for every percentage-point increase in US interest rates.
Chief News Editor: Sol Jose Vanzi
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