Just how vulnerable is the Philippines to the effects of the US financial crisis? Mrs. Gloria Macapagal-Arroyo said the Philippines is equipped to withstand the effects of the US financial crisis. But a labor economist thinks otherwise, saying the crisis could result, among other things, in job losses in the Philippines.
BY ALEXANDER MARTIN REMOLLINO
Just how vulnerable is the Philippines to the effects of the US financial crisis – which has been marked among other things by the recent bankruptcies of Fannie Mae and Freddie Mac, two of the biggest home mortgage loan companies; and Bear Stearns, Merril Lynch, and Lehman Brothers, three of the biggest financial institutions, in the US?
In her message during the Sept. 18 Philippine Economic Briefing held in Makati City, Mrs. Gloria Macapagal-Arroyo said the Philippines is equipped to withstand the effects of the US financial crisis because of its supposedly sound fundamentals, as well as because of the implementation of “tough economic reforms” that would result in increased revenues.
“The recent challenges we face are broadly external but they nevertheless require strong, decisive and targeted action internally,” Arroyo said. “The heights to which oil and other commodity prices have risen were unexpected and the depth of the financial market turbulence in the US is still unknown. Against this backdrop, the best buffer we have to external vulnerability is our own domestic internal strength.”
A labor economist, however, has argued otherwise. Paul Quintos, executive director of the Ecumenical Institute for Labor Education and Research (EILER) and a London School of Economics (LSE)-trained economist, said the US financial crisis could result, among other things, in job losses in the Philippines.
Immediate causes of the crisis
To rescue itself from the effects of stock market overinflation, especially in IT (information technology)-related stocks (i.e., the “dot com bubble”), the US in 2001 blew the real estate and construction bubble. US financial institutions offered low interest rates for home mortgage loans: even those with low income or with virtually no collateral were encouraged to apply for home loans. Their loans, which became known as “subprime mortgages”, accumulated in US financial institutions starting 2001.
To spread the risk exposure of banks to these subprime mortgages, it underwent a process of “securitization”, in which home mortgage loan packages were combined with others, packaged and sold as bonds and securities called as collateralized debt obligations (CDOs). These were guaranteed in credit default swaps (CDS) by insurance companies such as AIG and sold to other banks, financial investment houses, and companies in the US that deal in speculative investments for its high returns.
However, beginning in the last quarter of 2006, borrowers – especially those with subprime mortgages – increasingly failed to pay their amortizations. This caused a ripple of effects on banks and financial investment houses holding both the mortgages and CDOs, as well as those which issued CDS. This led to a series of bankruptcies of banks and investment houses, which were touted as “too big to fall”.
The effects of the subprime mortgage crisis have led to mortgage-credit losses of at least $400 billion, based on estimates by The Economist. The International Monetary Fund (IMF) estimates a loss of some $945 billion worldwide.
The US credit crunch following the bankruptcies could lead to recession, Quintos said in an Oct. 2 forum in Quezon City. He added that it could have the effect of contagion to the rest of the world economy.