, NOVEMBER 26, 2007 (STAR) By Des Ferriols - The Bangko Sentral ng Pilipinas (BSP) has warned that the credit crunch in the US is far from over but it also expressed optimism that the country’s economy is resilient enough to weather the fall-out.

BSP Deputy Governor Diwa Guinigundo said over the weekend that the central bank is not so worried about a repeat of the 1997 financial crisis that led to serious problems in the financial sector.

According to Guinigundo, the robust growth in the economy puts the country in a better position to survive the fall-out, buffered by a strong reserve position that was not present in 1997.

“We have not seen the worst of the credit crunch,” Guinigundo told reporters when asked whether the BSP thought the US crisis has bottomed out after the successive cuts in US interest rates.

Guinigundo said the BSP expects more financial institutions to announce heavy losses as a result of the credit crisis that stemmed from the long-brewing problems in the US home mortgage market.

“More losses could be announced by key investment banks and this is something that could affect risk aversion of foreign investors in their investments in emerging market,” Guinigundo said.

The reluctance of investors to put their money in emerging market would mean a slowdown in foreign exchange inflows since investors would be wanting to put their money in safer investments.

Nevertheless, Guinigundo said an edgy markets would do less harm to the country’s financial sector now than it did in 1997 when the stock market all but crashed as investors pulled out.

“The financial sector is much stronger today than it was years ago,” he said. “Rules are also better on structured products and that means our regulatory environment has contemplated more possibilities than it used to in the past.”

BSP Governor Amando M. Tetangco Jr. earlier said that the country’s economic fundamentals would ultimately determine the business prospects in the region and the Philippines would be singled out for its sound fundamentals.

According to Tetangco, the country has developed the kind of resilience that allowed it to weather both domestic and external disruptions.

“There is a wariness over the fragility of the US economic growth and possible increases in oil prices,” Tetangco said. “But I ask investors to focus on our fundamentals which I am confident will be sustained.”

Economic planners and investors alike were increasingly worried that the fall-out from the market sell-off could develop into a long-term concern that would ultimately affect long-term direct investment decisions.

In the wake of the panic over the US’ subprime credit market, Tetangco reiterated that the BSP has examined the exposure of banks in similar instruments and found only insignificant amounts in collateralized debt instruments as a whole.

Tetangco said the banking industry’s minimal exposure in collateralized debt obligations (CDOs) accounted for only 0.2 percent of its total assets.

According to Tetangco, the banking industry’s CDO portfolio consisted only of senior and mezzanine tranches and no subprime assets.

“We didn’t find any exposure in subprime assets,” Tetangco said. “The CDO assets currently held by banks are A-rated and higher, indicating no risk of a direct impact on the banking sector.”

Monetary officials have been trying to calm the market, saying that the fall-out from the problems in the US credit market was likely to have only a minimal impact on the Philippines.

Tetangco said the BSP is expecting only an indirect impact and since the market had sufficient domestic liquidity, this would limit the effects of the global sell off spurred by jitters over the US sub-prime market.

Will history repeat itself? PHILEQUITY CORNER By Valentino Sy Monday, November 26, 2007

(STAR) Mark Twain said, “History does not repeat itself, but it does rhyme.” While trying to learn from past crises, we found out that the closest and most similar to today’s subprime crisis is the US savings and loans (S&L) meltdown in the 1990s. Both had its origins in financial market innovation gone awry, poor market regulation, and a failure of rating agencies to protect the average investor.

The US savings and loans crisis

Late in the administration of President Jimmy Carter, the balance sheets of savings and loans institutions (or thrifts) came under severe pressure from the high and volatile interest rates during the late 1970s and early 1980s. Congress then substantially loosened S&L lending standards and allowed them to diversify into riskier and hugely profitable commercial real estate lending. This was a departure from their original mission of providing savings and mortgages.

At the same time, federally backed deposit insurance at these institutions was raised from $40,000 to $100,000. Not only did this spark off a mad rush of funds into these thrifts, it also further encouraged the thrifts to increase risk taking.

Compounding the S&L crisis was the considerable loosening of regulatory standards. In particular, the thrifts were given the option whether they were to be state or federally regulated. This encouraged excessive S&L chartering by many states (notably California and Texas) which stood to earn from large fees by offering ever more lax supervisory regimes.

According to a 1999 review by the Federal Deposit Insurance Corporation (FDIC), 1,042 thrifts with total assets of over $500 billion failed during the 1986-1995 period. The total direct costs attributed to the crisis amounted to $150 billion. In today’s costs, the S&L crisis would be of a similar magnitude to the current loss estimates of the subprime crisis.

(Note: We have shortened this discussion due to lack of space. For the full report on the US S&L crisis, go to our website at

Déjà vu?

Not only were the origins of the subprime crisis and the S&L meltdown similar, the market conditions today and in 1990 (the peak of the S&L crisis) also look the same. In both instances, oil prices spiked to new highs. There is also now a higher probability that the US will enter a recession, similar to the case when US plunged into a recession in 1990-1991.

Meanwhile, the impact to the stock market, especially to bank shares (in both cases), were devastating. As in the 1990s, when a majority of thrift banks closed shop, many banks, real estate investment trusts (REITs) and hedge funds now are suffering huge losses. Moreover, a number of mortgage lenders have already declared bankruptcies.

Actions to manage the crisis

The US Fed was successful in preventing a financial market collapse in the 1990s. It aggressively lowered the fed funds rate starting October 1990 from eightpercent down to three percent by September 1992. Prior to the cut in October 1990, the Dow Jones Industrial Average (DJIA) had fallen by more than 25 percent in a span of three months. The DJIA, however, recovered instantly after the October 1990 fed cut.

In today’s case, the Fed has not been as swift in stabilizing the financial markets. Some are already saying that the US is already in a bear market, citing a popular market timing system called the Dow Theory. Technically, we still think it is unclear. Although the market is holding at support levels, it may still go down. Nobody will know for sure how long it will take and where the bottom of the market will be. However, we are sure that the Fed will continue to cut rates until a recession is averted or until the US gets out of a recession (if it indeed pushes through). As in the early 1990s (see chart above), the stock market should start its recovery as soon as the market realizes that the Fed will be successful in putting off the recession.

Concerted central bank effort may be needed

With the possibility of a US recession threatening global growth, it is not farfetched to expect simultaneous cuts by central banks in order to thwart a global slowdown. Already, a rate cut is looming in the UK after the Bank of England downgraded its 2008 growth forecasts. Similarly, rate cut expectations in Canada have been rising since the strong Canadian dollar is now beginning to squeeze domestic activity as well as exports. There is also an increasing chance of an eventual ECB rate cut as risks to European growth remain on the downside and the euro continues to appreciate sharply against the US dollar.

If these cuts happen, we may finally see a rally in the badly beaten down US dollar. Furthermore, the problem of hyperinflation in oil and commodities (due to the falling greenback) will now be solved. And with a more stable US dollar, a rally in US equities markets should follow suit, followed by a recovery in other equities markets.

Chief News Editor: Sol Jose Vanzi

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