...but international financial institutions remain unfazed

The international financial market remained largely unfazed by the uproar over the imminent declaration of a fiscal crisis in the Philippines, opting instead to adopt a wait-and-see attitude until the dust has settled.

President Arroyo admitted last Monday that the government was in a midst of a fiscal crisis but after an emergency meeting, the Development Budget Coordinating Council (DBCC) said there was no plan to make an official declaration.

"We are talking of two different animals here: A fiscal crisis and the declaration of a state of unmanageable public sector deficit," said Finance Secretary Juanita Amatong. "What we discussed is whether or not we can declare the second one. There was no discussion of a fiscal crisis."

The bickering over terminology made the difference in the reaction of the country’s international creditors, credit rating agencies and the ever-watchful International Monetary Fund.

Economists had worried about the repercussions of the President’s initial statement, especially on holders of Philippine bonds here and abroad. So far, however, the spreads on Philippine debt papers even actually tightened overnight.

The Philippines’ foreign debt amounts to $57 billion and every year, over 40 percent of the national budget is spent on servicing interest payments on these debts.

Under the definitions used by the international committee, the declaration of a fiscal crisis had three very strict pre-requisites: The country must be in default, the country must have no access to the capital market and lastly, the country must be completely unable to finance its deficit.

Once a government officially declares a state of fiscal crisis, it would have meant an automatic downgrade by credit rating agencies since the primary indication was that the country had already defaulted on its obligations.

In contrast, the declaration of an unmanageable public sector deficit is a term used only in the Local Government Code, Amatong explained.

The state of unmanageable public sector deficit is the condition required to trigger a mechanism in the law that would allow the executive department to reduce the Internal Revenue Allotment for LGUs which is automatically provided in the annual General Appropriations Act.

Despite the ensuing confusion over terms, Finance Undersecretary Eric O. Recto said the reaction of the international market had been bland so far.

"They have access to all the numbers, they can plainly see our capital accounts and easily tell if we missed or we are about to miss even a single payment on our debts," Recto pointed out.

"So they know that clearly, we are not in default," Recto said, referring to the country’s creditors and credit rating agencies.

Still, Budget Secretary Emilia Boncodin gave assurances that even if the Arroyo administration decides to declare a state of unmanageable public sector deficit, the National Government would still continue paying its domestic and foreign obligations.

"Of course, we will continue paying our debts," Boncodin said after the DBCC meeting. "We have not yet decided whether we will ever declare it or not, but it is a study that will continue."

Boncodin admitted that the confusion caused by the President’s statement had rattled foreign creditors and holders of government bonds abroad. But she said the Arroyo administration was "not even considering" defaulting on its obligations.

Boncodin added that despite the burgeoning public sector deficit, the country still enjoyed access to foreign markets, successfully raising enough funds to cover its budget deficit for the rest of the year, including a 350-million euro bond issue sold last June.

The government’s remaining funding requirement for this year is a

$750-million loan which it needs to bridge on behalf of the debt-saddled National Power Corp.