A good reason not to panic


THE dreaded moment has come – or it was probably more than half-expected by most analysts, and now it has finally happened: The long, contentious negotiations between the financially-strapped government of Greece and the European Union have collapsed, creating an immediate financial crisis in the troubled nation, and throwing world markets into turmoil.

In a situation which is changing almost by the hour, the Greek government has ordered the country’s banks closed for the entire week and put strict limits on cash withdrawals through ATM machines, creating panic and anger among Greek bank customers. Greek banks and stock market are expected to remain closed until after July 5, when a snap referendum called by Prime Minister Alexis Tsipras on whether or not Greece should accede to tough EU austerity demands will be held.

Immediately, the euro fell to almost par with the US dollar, and bond rates soared in some of the EU’s other less economically sound nations, particularly Italy, Spain, and Portugal. Nervous investors fled financial markets as well, with a few exceptions.

Here in the Philippines, the PSEi ended Monday down nearly 55 points, or about 0.72 percent, which actually made it one of the world’s better performing markets on the day; losses in other Asian exchanges were in the 2 to 3 percent range, with even bigger declines in Europe.

Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. quickly sought to reassure local investors that the Philippines’ sound economic fundamentals would cushion any blow from the Greek crisis, but even he had to admit that the uncertainty, which is going to persist for at least a week as far as anyone knows right now, will create a great deal of volatility in the markets.

Tetangco’s assessment that the Greek crisis should not have much of an effect on the Philippines is probably correct in a textbook way. Greece is not at all a significant trade or investment partner of the Philippines.

However, there are two factors that the BSP may not be able to define and offer a recommended response to: First, the ‘human’ factor of fear that caused markets to tumble yesterday; whether or not it was rational, the reaction of investors to pull their money from markets had the real effect of wiping hundreds of billions of dollars of equity off corporate ledgers. Smart investors will realize that the underlying strength of companies is probably not really affected, but for at least a period of time capital expenditures and funding issuances will be reduced or postponed entirely, which will slow economic activity in places like the Philippines that are not directly affected by Greece’s problems.

The second factor is the global interconnectivity of the banking sector. Most of the debt (in the form of bonds) that Greece is apparently about to default on is held by banks, which may very soon find themselves holding a very large amount of worthless paper – about $500 billion worth. What has been happening up until now is Greece’s debt is simply rolled over; when a bond becomes due, the bondholder buys another (at a higher yield) and extends the repayment term by some period of time. At some point, however, all confidence is lost and those debts are no longer refreshed, potentially leading to big losses.

If the global financial system suffers losses due to bad Greek debt, borrowing costs will go up for everyone else; that’s not a welcome prospect for a country that is heavily reliant on foreign funding.

What is probably even more worrisome is the impact the Greek crisis will have on the Philippines’ important trade markets in Europe and America, where banks and investors are more exposed to Greek debt; a downturn will sharply lower demand for Philippine goods and services, at a time when trade and investment indicators are already showing signs of a slowdown.

The best advice for investors in the Philippines who are not directly exposed to Greece is most likely, “Don’t panic.” It seems fairly certain the Greek crisis will have an impact here, but rash action and a complete retreat from our otherwise sound financial markets will only serve to aggravate the problem. A clearer explanation to that effect from the BSP and its trusted governor would go a long way to preventing unnecessary difficulties here.


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1 Comment

  1. Our Central Bank must determine how much exposure to Greek debt banks abroad, where we keep ou US dollar denominated assets, have and act accordingly.

    Amado F. Cabaero