BSP preparing for US debt default

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The Bangko Sentral ng Pilipinas (BSP) is prepared for the worst situation that the United States default may inflict to the Philippines and other financial markets, according to a BSP official.

“Expect the worst so you are also preparing for the worst. And that’s what we’re doing. We continue to monitor, we continue to do our surveillance—national level information, regional and global,” BSP Deputy Governor Diwa Guinigundo said reporters.

Guinigundo noted the central bank is regularly reviewing all the indicators of the country’s financial system, such as the overall balance of payments—current accounts, financial and capital accounts—and all its components.

In case some red flags are coming up, the BSP official assured that the central bank has various monetary policies in place if it is needed to be implemented.


However, Guinigundo explained that if the US will not be able to raise its debt ceiling, which has an October 17 deadline, it means that the government will not be able to refinance its maturing obligations.

He said that there will be a big impact not only on the US financial markets but to the global financial markets.

“That is one major result or outcome, but if you have invested in a treasury and it is maturing, and your debtor cannot pay you back then what happens. So the next time they borrow, assuming they are able to resolve immediately or at least within reasonable period of time their obligations, people will now demand a higher premium,” he added.

Furthermore, the BSP official noted that the impasse in the US government may result in the upper adjustment of global interest rates, which will on top of the effects of the tapering by the Federal Reserve of it bond buying program.

Asked if the US default is worse than the 2008 financial crisis, Gunigundo said that it will really depend on how fast and how definitive the resolution will be.

“I’m sure the US government, the Fed and the Treasury, they’re all aware of the implications if the government not able to pay or amortize or pay back their obligations. It is also unthinkable that the US government will not resolve this stalemate between the executive and the legislature, because market sentiment will turn against the US,” he said.

Meanwhile, Guinigundo also warned that there might be some “liquidity crunch” in the US and in other advanced economies.

“But in the emerging markets, [if there would be liquidity crunch], the pull factors will be stronger and therefore the capital reversal that we used to see in the month of August and September might be reversed. And that’s what we saw in the last two weeks of September, some reflow back to the emerging markets,” he said.

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