Opinion: Loren on borrowing binges

Written by Dean de la Paz / Through the Looking Glass
Thursday, 14 January 2010 21:00


Original Story: http://businessmirror.com.ph/home/opinion/20936-loren-on-borrowing-binges-.html


Sen. Loren Legarda’s reservations on resurgent debts are timely. There is something seriously warped when the first news of the year involves a perpetuation of one of our oldest curses. Not yet a full week into the year that took forever to come since Gloria Arroyo seized the presidency and then declared a fiscal crisis in 2004, and even longer from the time she escalated the value-added tax to allow aggressive state spending, her finance managers have very quickly sunk us into an incremental $1.5 billion in newly minted debt.

Over a billion in euro bonds are to follow. And after that, Japanese private placements. “Who benefits from these?” Legarda asks.

Conceivably 2010 is the last chapter in Arroyo’s incumbency, despite immortal debilitating debts. The year 2010 was also yearned to be the long-coming endgame to one of the most painful episodes in our economy. Technically, Arroyo has less than six months before that dawn many wish would come quicker than the creeping pace that constitutionality insists we endure.

Never mind that we blindside ourselves to a looming Armageddon in a remote congressional district familiar to those dopey on dangerous drugs and dependent on numbers games. Never mind that the elections may not be the last syllable in this political curse. And never mind the ominous apocalypse for institutions once revered but now only reminisced in memoriam.

Political volatility intensifies risks and, consequently, the cost of borrowings, compelling debt renegotiations posthaste before uncertainty escalates. Unfortunately, Arroyo’s policy of unbridled indebtedness is quickly demanding retributions. Already the national debt rockets beyond P4.23 trillion.

On December 23, 2009, over P1.3 billion in bonds with rates as high as 14.9 percent matured. Between February 3 and March 2, 2010, over P2.5 billion more bonds are scheduled for redemption, with rates ballooning from 14.62 percent to 14.75 percent. These bonds, in the high fourteens, will continue to mature until September 2010. Outstanding Arroyo-issued 10-year bonds are scheduled for maturity from December 2010 to January 2011 through October 2011. These bear the highest rates for 10-year indebtedness ranging from 16.5 percent to over 17.5 percent.

Seriously alarmed following official declarations of more aggressive borrowings as Arroyo sings her swan song, Legarda noted “recent surveys indicate more Filipinos rated themselves poor and hungry than ever before, indicating that government claims of success in fighting poverty are grossly exaggerated.” More than the exaggerations and hyperbole, the hunger statistics now count 4 million against prospects where taxes are exponentially increased, greater bureaucratic fees are levied and humongous debt is resorted to by a government claiming dubious successes in poverty alleviation.

Legarda asks, “With annual tax collection always falling far short of required expenditures, the government resorts to borrowings from abroad to make ends meet. But who really benefits from the borrowing spree?”

Legarda’s question is profoundly pointed. The answers virtually present themselves. Laws demand a respite from initiating public-works projects within a campaign period. If infrastructure spending is effectively on hold, who benefits from Arroyo’s unmitigated borrowing spree and this vicious recycling of indebtedness?

With the incremental billions in freshly minted debt and less than a year to go in a period characterized by desperate political spending to boost the fledgling candidacies of single-digit-rated bets, the answers seem obvious.

The desperation for incremental funding is proverbial and familiar. In 2004 Arroyo demanded both votes and funds be generated by her Cabinet. The year 2010 is far more critical as the fiscal situation has deteriorated and the public’s yearning for democratic normalcy and criminal accountability denies the perpetuation of the lying, stealing and cheating governance model nurtured by excessive debt and taxes.

Legarda’s focus on who benefits from borrowing sprees belies the reality of risks, rates and returns, and the high price paid for unproductive indebtedness.

Demand for Philippine papers is a function of returns and risks. Desperation increases risks. Higher risks demand higher rates, and higher rates mean higher returns for debt paper purchasers. Junk bond rates attract funders, depending on earnings options prevalent in markets purchasing these papers. Given global deleveraging and the low rate regime in the United States and Europe occasioned by their stimulus programs, the relatively high-coupon debt offered by the Philippines turns temptingly attractive.

The foregoing is academic. One beneficiary of high-cost debt is the bond holder at maturity. But on the flip side of Legarda’s query, the question of victims who pay with blood for Arroyo’s borrowing spree compels a riposte.

Stand before a mirror and reflect. The answer should no longer surprise us.


Original Story: http://businessmirror.com.ph/home/opinion/20936-loren-on-borrowing-binges-.html