A financial twister


Let’s prepare for an even bigger typhoon than Pedring that hit us this week. This one promises to be even bigger than Ondoy. In fact, it threatens to be as disastrous as the tsunami that hit Japan. But unlike typhoons or tsunamis, this one is not to be brought upon us by nature. It is rather a result of uncontrolled greed of capitalists whose misdeeds caused us a near depression in 2008.

George Soros argues that the impending worldwide financial meltdown is still a consequence of the 2008 crisis. It was only recently that I finally understood what caused it, thanks to a documentary with Matt Damon in it. At a time when credit was cheap and cash in abundance, Wall Street traders devised a scheme by which home mortgages, secured by insurance companies, could be traded. This became known as collaterized debt instruments. It turned out that these debt instruments were worthless since many American borrowers had no ability to repay their loans. This then led to the bankruptcy of Lehmann Brothers, an investment giant that had dealt with these instruments, and the near bankruptcy of another giant of a company that secured such instruments, AIG. In fact, many other banks and companies would have gone under in 2008 had not the US federal government made the policy decision to rescue similar companies in distress. The ultimate enemy was panic. As bank and other financial intermediaries go under, depositors panic, interest rates rise, cost of manufacturing becomes more expensive, and consequently, economic activity slowed down.

Today, the cause of the panic may be the debt crisis in Europe. This time around, it is not just private financial companies that may go under. Even developed states such as Greece, Portugal and Ireland face the possibility of bankruptcy.

What complicates the financial woes in Europe is that the European Union established a common currency for a continent with diverse economic conditions. The traditional powerhouse in the continent has been Germany with a solid manufacturing base and a proven export record. But part also of the Union are countries such as Greece whose economy, and hence, local currency, was at least 30 percent less than that of Germany. Consequently, when countries such as Greece became part of the Euro, their governments have to rely on government borrowings through sovereign bonds to shore up their fiscal position relative to the rest of Europe. These are the bonds that the Greek government is now unable to pay.

Soros warned that the situation is more perilous than in 2008 because unlike the US, Europe does not have a Central Bank that can intervene to calm the nerves of edgy investors. The matter is made worse by the fact that as much as Germany would like to intervene, its Constitutional Court has ruled that it cannot do so without the consent of its Congress, the Bundestag. Soros then advised that the best recourse would be to allow Greece and other European states similarly situated to exit from the Euro zone rather than face the possibility of a full-blown meltdown. Soros writes: ” The fact that arrangements are made for the possible default or defection of three small countries does not mean that those countries would be abandoned. On the contrary, the possibility of an orderly default—paid for by the other eurozone countries and the IMF—would offer Greece and Portugal policy choices. Moreover, it would end the vicious cycle now threatening all of the eurozone’s deficit countries whereby austerity weakens their growth prospects, leading investors to demand prohibitively high interest rates and thus forcing their governments to cut spending further”.

The last time Soros wrote about a financial disaster, the 2008 crisis occurred. At the time he wrote his warning, leading financial policy planners belittled his words as being unduly “alarmist”. Well, Soros was proven right and the rest is history. If only because of his proven track record, his latest warning as published by the New York Times should be heeded by policy makers.

The question in my mind is this: What steps has our own government taken to prepare us for this meltdown? Sure, we should be not as affected as our neighbors who have successfully developed their economies through exports. But as a country almost wholly dependent on the export of manpower—with our seamen deployed in Greek vessels and an army of domestic helpers employed in countries that have benefitted from surplus capital which is expected to dry up—the Philippines should take steps now to minimize the impact of this looming crisis.

In the past three months, what has been apparent is that after a year in office, President Benigno Aquino III has finally realized that the way to the Filipinos heart is to hit the past administration for its many sins against the people. This explains why he has recovered the public trust as reflected in his improved standing in surveys conducted by Pulse Asia and SWS. But with this looming disaster in the horizon, I would hope that all efforts should now be focused on minimizing the dire effects of this impending financial twister.

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One comment on “A financial twister

  1. Renato Pacifico says:

    The government and the people of the Philippines was, is and will be ready of domestic & worldwide economic meltdown … 200 days of Novenas and prayers was started a couple of weeks ago.

    NOTHING BEATS PRAYERS AND NOVENAS, well, for the past 480 years it did not worked and they are still expecting a positive outcome …

    GALING FILIPINOS ! GALING TALAGA !

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