Over the past week, I have been talking with people who should know about debt swaps. I had a long talk with former BSP Governor Gabby Singson, former BSP Governor Paeng Buenaventura and communicated by e-mail with former Finance Usec Romy Bernardo. Based on what I understand from what they told me, this debt for equity proposal is good for press release purposes only.
What did Ate Glue propose in her UN speech on recommendation of Speaker Joe de V? According to press reports, they want to convert 50 percent of the debt-service receipts of lending institutions and multinational commercial banks into "equity development and anti-poverty projects that poor countries are undertaking to meet their national MDG goals over 2005-15."
If Ate Glue was more like FVR who always insisted on CSW or complete staff work, she would have found out that there are serious problems with the proposal. Romy Bernardo, who handled his share of debt swaps during his time at the Finance department, points out that by simply looking closely at government’s foreign debt by creditor type, "we will see why calls for debt relief are not likely to go anywhere, and can even be potentially counterproductive."
It is not possible to now convert 50 percent of the debt-service receipts of lending institutions and multinational commercial banks into "equity development and anti-poverty projects" because the profile of our creditors has changed. The amount owed to multinational commercial banks has dipped, multilateral lending institutions may have problems with their own funding sources and bondholders who now account for a large part of our debts are not going to stand for it.
The multilaterals like the ADB and the World Bank, despite a polite promise of Paul Wolfowitz to Foreign Secretary Bert Romulo to study it, might hesitate because they rely on the capital market for 90 percent of their lending. As former Finance Usec Romy Bernardo observes, providing relief to a large borrower like the Philippines will impact on their own capital market access and cost of funding.
As it happens, a large part of our country’s foreign debt is now in bonds. Who are these bondholders? Ordinary investors... high net worth individuals, institutional investors including Philippine banks are likely holders of Philippine bonds. Believe it or not, a lot of locals, individuals as well as local banks are holders of Philippine foreign debt papers. They are many and mostly anonymous. When the National Treasurer borrowed $1 billion a week ago, he issued bonds again.
Why would these bondholders, even Filipino bondholders, want to swap their bonds for investments on schoolhouses, training teachers and setting up rural health centers? Those are precisely the things we pay taxes for. That’s government’s responsibility. They would swap only if there is money to be made and for no other reason. The Speaker does not say how money can be made for these investors under his debt to equity proposal in today’s market.
Former BSP Governor Gabby Singson, former BSP Governor Paeng Buenaventura and former Finance Undersecretary Romy Bernardo all think the debt swap scheme is not as workable, nor practical now. Romy pointed out that "unlike in the 80s, amounts owed to foreign commercial banks today represent an insignificant share (three percent) of outstanding debt and thus, debt relief will not significantly reduce government’s debt."
Former BSP Governor Paeng Buenaventura said the same thing. Gabby Singson further explained that even the notorious nuclear power plant debt that I wanted cancelled, can no longer be subject to debt relief because it had been restructured in the past and converted to among other forms, the Brady bonds of the 80s. Worse, the former BSP Chiefs warned, we will give the impression that we have problems paying our debts and that perception would affect us in the worst possible way.
Romy Bernardo explains that foreign-exchange denominated capital market debts make up 53 percent of outstanding government foreign debt. "But here is precisely where calls for debt relief (default call, really) are counterproductive as these may send signals to the financial markets that the country is unable or unwilling to honor its debts."
Romy warns "debt relief calls can raise the cost of financing for the Philippines (the country needs refinancing of $4 to $5 billion every year). A one-notch rating downgrade is expected to increase interest cost immediately by P550 to P690 million."
Romy and the former BSP Chiefs warn that once something like Joe de V’s proposal is taken seriously as a government position, "it may lead to unintended payments crisis and may even trigger a banking crisis as Philippine banks hold a large percentage of outstanding Philippine foreign paper. Banks are leveraged institutions and even a small loss due to new mark-to-market valuation regulations can lead to capital impairment and bank runs."
Gabby Singson explains that the situation today is not like in the 80s when the conditions for a debt swap were present. That was also what Romy Bernardo said. Because of the debt moratorium we declared in the early 80s, there was a big drop in the market value of our debt. The significant difference between the depressed market value of our debt and the face value (or close to face value) at which the country was prepared to redeem it made a debt swap attractive to investors.
"In contrast," Romy explains, "there is no default or immediate threat of default at this time... and a contemplated default would put the banking system at peril." That could turn our fiscal crisis into a full blown financial crisis, a real nightmare we don’t want to imagine. Start thinking Argentina.
Joe may have also forgotten that even under his proposal, the government would still have to produce the pesos to be swapped with the forex denominated debt. We cannot just print the pesos. All the needed pesos must still be appropriated in the budget. This means, there is no positive impact on the fiscal crisis, which is our main concern today.
So, what was Speaker Joe thinking? What did he want to accomplish? His proposal at best, may postpone having to pay the foreign exchange obligation on our debt service, but would not make more pesos available in the budget for education and health care among other MDGs, as Joe’s press releases seem to suggest.
If the objective is to reduce debt, Joe de V’s debt for equity proposal is not going to do it. Romy Bernardo rightly concludes "there is no magic wand that can make the debt just disappear... there are only two sensible ways of reducing the debt burden – to grow out of it through higher economic and export growth, and working towards reducing government’s deficits over time (i.e., increasing government’s primary balance, or the equivalent of EBITDA in the private sector). Indeed, the energies of both the executive and legislature are better spent ensuring the attainment of these two goals rather than crafting and marketing debt swap deals that may lull the financially non-literate to think there is a magic wand somewhere."
Romy was being polite. What he really meant was that Speaker Joe’s proposal was a politician’s way of offering hope for a miracle where none is forthcoming. Ate Glue must simply run a tighter ship of state and not waste money on junkets for supporters and foreign lobbyists. We have to regain investor credibility. The national leadership must be perceived here and abroad as serious about good governance.
Come to think of it, given the track record of our leaders, the day of reckoning may just be a matter of time, anyway.
The Palace today announced it is changing its seal to a condom because it more accurately reflects what the administration stands for.
A condom allows for inflation, halts production, destroys the next generation, protects a bunch of pricks and gives you a sense of security while you’re actually being screwed.
Boo Chanco’s e-mail address is bchanco@gmail.com