Europe debt problem has BSP on edge


The Development in Europe has the Bangko Sentral ng Pilipinas on edge.

The BSP said that the unraveling of the crisis in Cyprus could trigger the flight of capital away from emerging markets like the Philippines.

BSP Governor Amando Tetangco Jr. told reporters that the central bank is prepared to implement measures to maintain the stability of the Philippine economy.

“What is concerning financial markets globally is the fear of contagion,” Tetangco told reporters.

He was referring to the agreement among members of the European Union to require depositors to share the burden of bailing out crisis-stricken Cyprus if the country were to get financial aid.

If the government of Cyprus would agree to receive financial support from the European Union, bank deposits worth at least 100,000 euros would be imposed a one-time tax of about 10 percent; deposits worth below the threshold would be slapped a tax of 6.5 percent.

The concern among market players is that other countries in the euro zone that also have debt problems may be asked to swallow the same bitter pill.

Financial markets worldwide are shaken by the thought that even money placed in banks may no longer be safe.

On Monday, “we saw flight of capital toward ‘quality.’ As a result, yields on US treasuries went down due to higher demand and the peso weakened a bit,” Tetangco said.

He said the the debt problem of Cyprus showed that the crisis in the euro zone is far from over.

In response, the BSP is carefully monitoring market developments to determine implementation of appropriate measures at the right time, Tetangco said.

Currently, the Philippines and other emerging markets in Asia are witnessing a surge in inflow of foreign portfolio investments due to the growth of their economies.

Data from the BSP showed that net inflow of foreign portfolio investments reached $211.65 million in February, a reversal from the net outflow of $305.30 million in the same month last year.

The surge in foreign portfolio investments has prompted the BSP to implement measures to temper the adverse effects of the inflow and ensure it does not stir up volatility in the market.

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  • Hayek_sa_Maynila

    “On Monday, “we saw flight of capital toward ‘quality.’ As a result,
    yields on US treasuries went down due to higher demand and the peso
    weakened a bit,” Tetangco said.”

    This should not be a big concern. In fact uncertainties in Europe could be a blessing in disguise as it eases the pressure on the monetary authorities to continue buying USD in the market and pay a high price for sterilizing their interventions in the market. It also has to worry less about money supply expansion as there is no peso liquidity to siphon off when there are net outflows of dollars from the system.

    It may actually be good for the BSP to allow the market to approach the 41.000, 42.000 or even 44.000 levels again whenever these EU uncertainties arise, so that when confidence returns, the struggles that BSP have to go through to avoid a drop to a damaging sub-40.000 exchange rate would be significantly reduced. In other words, it might be good if the interventions of the BSP can be made asymmetric with a slight bias for depreciation, to help it cut its sterilization costs significantly. Both the BSP and the economy win.

    This will not necessarily be inflationary since global oil prices tend to drop when uncertainties in Europe rise as this typically indicates softening of demand.

    These negative events abroad as we have seen have also helped remove some of the froth from the local equity market which has been running at break neck speed lately. This applies to the rest of the asset markets, including the property and local bond markets.

  • just_anotherperson

    It is the socialist mindset.

    They call it wealth redistribution.

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