October 17, 2013: Uncertainty, Catastrophe or Survival?

collage3Last October 15, 2013, Bohol and Cebu suffered a dreadful calamity and devastation of a 7.2 magnitude earthquake causing buildings to collapse and the lost of several lives. Let us pray that all goes well to with all those who had to go through this tragedy. Our deepest sympathy to all the people affected by the calamity.

However, another catastrophe is about to hit, not only the Philippines, Asia, Europe, the United States but the entire global community.

This is the uncertainty of a possible failure of the U.S. government to pay its debts due on October 17, 2013. Will we survive should the U.S. fail?

Barely a few months ago, BSP said there was no reason to be worried about a possible “property bubble”.

Uncertainties in the Global Financial Sector, also has its share of fears and threats. The Question is , How will real estate and the financial markets be affected as we ” wait and see”. The US standoff and infighting of US Lawmakers and Obama’s challenge remains to be seen.

As i see it, the self- inflicted U.S. financial crisis, is all about pride, greed and political power.

The Tag-o-war between Republicans and Democrats is putting the world in a state of wonder. How can a “leader” Nation be so blind about the U.S. $ 16.7 Trillion Dollars Debt due tomorrow!

Even the IMF, issued warning signals and urged the US politicians to stop the crisis. China is the biggest and largest owner of US Treasury Debt bills, amounting to US $ 1.277 Dollars.

Our Safety and Security in U.S. Investments , depends of how the Obama administration ,  sees the bad and sad consequences  of its decision to ” hold on no matter what” .

In my opinion it’s a bluff. But, one can never be sure of what the Americans are up to. Is it about concessions, reforms, federal spending, and the ObamaCare program? Or simply a National- Global conspiracy for a calculated catastrophe?

after all had been said and done, Obama-No-Care will most likely blink

After all had been said and done, Obama-No-Care will most likely blink.

Well, let us hold on to the rollercoaster horror ride. But I am sure, one side will “blink”… and I hope it’s President Obama’s eye lids…

Last August 1, 2011, Amelia H.C. Ylagan published at http://www.bworldonline.com a forecast on the dilemma of the U.S. government having to pay its national debt. To understand this “clear and present danger”, I quote..

“…Yet by dint of its continued political and economic influence, the US has remained “Uncle” to the rest of the world. And countries have kept to the 60-65% US dollar reserve of choice for the immediate past two decades, followed far by the euro (formerly held by the German deutschemark) by a weakling 25%. But new world superpower China is openly angsty about the 1.2 trillion dollars of China’s foreign reserves invested in US treasury bonds, when the US has a terrifying $14.3-trillion debt, the largest owed by any country to the world. Over the critical weekend of the US Senate debates on the proposed increased debt ceilings, international news reported the US debt-to-GDP ratio as at 102% with the proposed schemes.

Basically, the US Legislature is in agreement as to the need to increase the debt ceiling, to preempt unserviceable debt maturities. The bill proposed by Republican House Speaker John Boehner proposed an immediate $900 billion increase in US borrowing with $917 billion in spending cuts spread over the coming decade. The sweetener to appease the “Tea Party” group (a tax-and-debts advocacy) is the balanced-budget amendment, considered a veritable poison pill by the Democrats because it will thwart the plans and programs of the administration.

Senate Majority Leader Harry Reid’s (Democrat) alternative measure would raise the debt limit by up to $2.4 trillion, to keep President Obama safe with his plans until 2013, if they are to agree to the almost $1 trillion in agency budget cuts over the coming decade. Amidst all these to-and-fro, Rep. Jerry Lewis, R-Calif., reminded that then-Sen. Barack Obama had years ago campaigned actively against raising the debt limit. Yet if Congress will not now approve raising the debt ceiling, the government will default on debts soon after Aug. 2, 2011 maturities. Analysts say the consequences would be “globally catastrophic: financial markets would take fright, interest rates would soar, the dollar would slump and banks would call in loans, creating a second credit crunch.”

President Obama debating with Republican House Speaker John Boehner  and Democrat Senate Majority Leader Harry Reid

President Obama debating with Republican House Speaker John Boehner and Democrat Senate Majority Leader Harry Reid.

Some say that in the sure prospect of China’s unabated economic clout, the Chinese renminbi can be expected to replace the US dollar as a reserve currency around 2050. But then China would first have to ease restrictions on money entering and leaving the country and make its currency fully convertible for such transactions, these same analysts say. Anyone would add that China must allow its currency to devaluate freely, continue its domestic financial reforms and make its bond markets more liquid.

Doesn’t Uncle know this all?

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Mayvelin U. Caraballo of Manila Times on his report “BSP Warns of US default’s implications” last October 7, 2013 wrote…

“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.

BSP Governor Tetangco receives his award as one of the world's six  best central bankers in 2012 from Global Finance. "the filipino is resiliant and strong amids graft and corruption in the government"

BSP Governor Tetangco receives his award as one of the world’s six best central bankers in 2012 from Global Finance.
“The Filipino is resiliant and strong amids graft and corruption in the government”

“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, BSP Governor 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.”

Tom Mitchell in Beijing, Gina Chon in Washington, Ben McLannahan in Tokyo and Paul J Davies in Hong Kong wrote an article “China and Japan warn US on default” in Financial Times website stating…

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Japan Prime Minister Shinzō Abe
“…we warned you, if you dont pay, gigantic tsunamis will hit the shores of the United States…”
Honorable Prime minister Li Keqiang of China
“Mr. Barac, your time is up…”

“China and Japan ratcheted up pressure on the US to avoid an unprecedented US default on its debt as Democrats and Republicans continued their stand-off over the budget in the second week of a US government shutdown.”

the arrogance of a powerful President may lead to global catastrophe

The arrogance of a powerful President may lead to global catastrophe.

Two senior White House economic officials said on Monday that President Barack Obama would not back down from his refusal to negotiate with Republicans in Congress, increasing worries that the debt ceiling limit would be reached on October 17 without an agreement, raising the threat of a default.

House Republican leaders have maintained a hardline in the current budget battle. John Boehner, the Republican speaker of the House of Representatives, declared on Sunday it was “time for us to stand and fight” over the US budget.

The rhetoric from US politicians rattled China, with Mr Zhu noting that “the US has a large amount of direct investment in China, and China has a vast number of US Treasury bonds . . . The US is clearly aware of China’s concerns about the financial stalemate [in Washington] and China’s request for the US to ensure the safety of Chinese investments.”

China held $1.28tn in US Treasuries in July 2013, according to US Treasury data, although the true figure could well be higher than this as China also invests through intermediaries. Advisers to the People’s Bank of China, the central bank, have been urging the authorities to diversify the holdings.

“As the world’s largest economy and an issuer of the world’s major reserve currency, it is important that the US take credible steps to address its dispute over the debt ceiling in a timely fashion and avoid a default.”

Other bankers and traders in Asia were sanguine about the threat of a US default with several people saying the drama playing out on Capitol Hill was “just political theatre”, or in the words of another, a US default “just ain’t gonna happen”.

Maricel E. Burgonio and Darwin G. Amojelar of InterAksyon.com wrote on her article “PH economy can weather US shutdown, but BSP warns of market volatility” last October 1, 2013…

“Despite the return of market volatility, Philippine economic managers however said the country could survive the US shutdown.

“The domestic economy has sources of resilience owing to the buffers we have built,” BSP Governor Tetangco said.

Cesar-Purisima-300x190

Finance Secretary Cesar Purisima

Purisima said the Philippines’ “strong fiscal position, a structural current account surplus, and a young educated population” will allow the country “to ride out this situation better than emerging markets, whose economic models are exports and extractives-based.”

The Philippines’ gross domestic product (GDP) grew 7.6 percent in the first six months of the year, making it one of Asia’s fastest growing. The first-half growth was way above the government’s full-year target range of 6-7 percent.

Earlier today, Socioeconomic Planning Secretary Arsenio Balisacan said the Philippines could sustain its record expansion, with growth likely to have remainedabove seven percent in the third quarter on strong consumer spending and investments.

“There’s going to be a bit [of an impact], but it’s not going to be as big as the global financial crisis of 2008,” Balisacan said, adding that the impact would depend on how long the uncertainty would last.

“This is the third time they have reached a deadlock. Most likely, the US government cannot be in that kind of situation for a long time,” he told reporters.

But “I doubt it will affect trade,” Balisacan said.

After Japan, the US is the Philippines’ second biggest trading partner, with bilateral trade in goods amounting to $14.5 billion, or 12 percent of Manila’s total trade of $113.7 billion in 2012.

Economic professor Victor Abola of the University of Asia and the Pacific however said the US shutdown would result in a one to two percent cut in Philippine GDP growth.

Economic professor Victor Abola of the University of Asia and the Pacific.

Economic professor Victor Abola of the University of Asia and the Pacific.

“I am not expecting exports to rebound because of the US government shutdown. The bigger part of exports come in the fourth quarter,” he said.

Data from National Statistics Office showed that exports to the US reached $4.2 billion in the first seven months of the year, down from $4.7 billion in the same period last year. In July alone, Philippine sales to the US reached $610.84 million, down by 8.7 percent from $668.69 million in 2012.

On the article “US default ‘unthinkable’ ” in Business World, Finance Secretary Cesar V. Purisima told Reuters “A US default is something unthinkable. But we’re facing it from a much stronger position,” The Philippines was finally growing at a healthy and steady pace after years of being Asia’s economic laggard. Its improved economic performance will help it face this latest global challenge, Mr. Purisima added.

Mr. Purisima stated “There’s really nothing we can do, but focus on the things that we can control and that’s why we’re continuing to work on our fundamentals.”

The US Treasury reaches its debt ceiling and runs out of authority to borrow on Thursday, October 17,2013. 

Mr. Purisima added that the Philippines did not have a plan in case of a default, because he believes it’s not going to happen. “I am not even thinking of a default. We have full faith and confidence in the United States,” he said.

The Philippines held about $38.9 billion in US Treasuries as of July 2013, based on the latest US capital flows data from the Treasury department. That’s equivalent to about 47% of the Philippines’ international reserves in July of $82.942 billion.

The Philippines has been one of the few bright spots in Asia, having been upgraded to investment grade by all three ratings agencies. It has been growing at a solid pace in the last few quarters: the economy grew 7.6% from April to June. It has kept pace with China, with the two becoming the region’s fastest growing nations this year.

The Philippine peso is down 4.7% so far this year against the US dollar, but has been spared the steep losses suffered by its peers in Southeast Asia, as the Fed tapering its bond buying became evident from May until early September. The Indonesia rupiah, for instance, has fallen more than 15%.

Mr. Purisima said the Philippine government intended to raise financing in the offshore debt market next year, “not because we need the money, but because there has been demand for our debt paper.”

Mr. Bean suggest that to survive, one must swim or sink and learn to ride the waves.

Mr. Bean suggest that to survive, one must swim or sink and learn to ride the waves.

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