The Bangko Sentral ng Pilipinas (BSP) on Thursday urged markets to still prepare for volatilities despite the raising of the US debt ceiling that prevented the federal government to enter a default.
In a text message to reporters, BSP Deputy Governor Diwa Guinigundo said that the US just avoided on late Wednesday what otherwise could have been a “financial conflagration.”
After weeks of a long impasse, the US Senate and Congress were able to reach an agreement to raise the federal government’s debt ceiling until February 7th of 2014, and to fund their federal government operations until January 15th.
The measure passed on late Wednesday with less than two hours to go until October 17, the date from which the Treasury had warned it might not be able to pay its bills.
“But we should not treat this as an open-ended extension of peace time. The agreement to adjust the debt ceiling will be good only until February 2014. We might be back to this wait and see situation by then,” Purisima said.
He added that in the short term, central banks and government holders of US treasuries will have to make the necessary adjustment, “although difficult and options are not readily available.”
The BSP official urged that everybody should be ready to brace themselves for a possible heady ride through market volatilities, noting the need to prepare truly for a new normal, or for some people, “new abnormal.”
“The challenge is really to get back to higher, more sustainable economic growth built without dependence on excessive financial leveraging. That will of course require sustained policy reforms, intensified oversight of the financial system, avoidance of asset price inflation, continued fiscal and monetary policy coordination,” he said.
For his part, Finance Secretary Cesar Purisima said that the measure passed by the US legislature is a positive development that buys time, however, the US should still look at a more permanent solution to its debt ceiling, especially on the issue of its borrowing limit.
“If the US is to maintain its role as the printer of the global reserve currency, its leaders cannot view going to the brink of default as a viable political tool,” he said.
Purisima added that the so-called governing by crisis, where the entire world’s economy has to be held hostage to force a decision, cannot be allowed to become standard operating procedure in Washington.
“Because the world’s economies are connected even as far away from the US as the Philippines, every standoff between America’s ruling parties forces the rest of the world to watch with anxiety,” he said.
The Finance chief further stated that the US should look seriously at a more permanent solution to shield the world economy and financial markets from its domestic political squabbles.
On the other hand, the International Monetary Fund (IMF) also welcomed the recent stance of the US government.
IMF Managing Director Christine Lagarde said that the US Congress has taken an important and necessary step by ending the partial shutdown of the federal government and lifting the debt ceiling.
She noted that the US action “enables the government to continue its operations without disruption for the next few months while budget negotiations continue to unfold.”
“Looking forward, it will be essential to reduce uncertainty surrounding the conduct of fiscal policy by raising the debt limit in a more durable manner,” she said.
“We also continue to encourage the US to approve a budget for 2014 and replace the sequester with gradually phased-in measures that would not harm the recovery, and to adopt a balanced and comprehensive medium-term fiscal plan,” the IMF official added.