The Bangko Sentral ng Pilipinas (BSP) warns of serious implications that could be triggered once the United States government enters a debt default.
A budget row over President Barack Obama’s health care law led to the partial shutdown of the US government on October 1. The shutdown is on its sixth day now, while an October 17 deadline for the Congress was set to increase the government’s debt ceiling to prevent it from entering a default.
“Some people are worried about the default because as the October 17 deadline nears, both policy makers and business leaders are getting more concerned about the possibility of a failure on the part of Congress to reach an agreement,” BSP Governor Amando Tetangco Jr. said in an interview with the reporters over the weekend.
He warned that the occurrence of actual default can lead to “dire consequences,” which could negatively affect the global financial markets.
“It’s possible that [the]credit market could freeze, the US dollar can plummet and US interest rates can soar,” he added.
The BSP governor noted that the said consequences will have negative spillover effects for the rest of the world, adding that the monetary authority is still hopeful that the issue will be resolve soon.
Meanwhile, Tetangco assured that the Philippines have sources of resilience to cushion the impact of a potential US default.
“In the meantime, we have sources of resilience [such as]robust economic growth, low inflation, healthy external position, sound banking system, improved fiscal performance and improving debt metrics,” he said.
However, Tetangco admitted that the most immediate concern for the country if the
default will actually take place is liquidity, or the money supply.
“Just like what happened in 2007, banks will not be willing to lend each other because they want to keep their cash to themselves. As a result, interest rates can rise significantly and the US dollar can react negatively to that because of erosion of confidence,” he said.
Latest BSP data showed that the country’s money supply sustained its growth, increasing by 30.9 percent year-on-year at end-August 2013 to reach P6 trillion.
The expansion in credits to the domestic sector and adjustments in the special deposits accounts facility of the BSP continue to be the growth driver of domestic liquidity.