Collapse of the euro will rattle PH economy

There’s trouble in the European Union (EU) and the situation is likely to get worse before it gets better. At the heart of the problem is the euro, the common and exclusive currency of the 17 nations that comprise the eurozone.

The eurozone is not the EU, which has 27 member states. The 17 eurozone countries have demonetized their former national currencies and agreed to have only the euro as their legal tender.

Some of the 10 European Union member states that are not in the eurozone group are candidates for inclusion. They will be admitted as soon as they qualify, mainly by meeting fiscal solidity and governance requirements. Others, like the United Kingdom and some of the Scandinavian states, refuse to join the eurozone despite the strength of their economies and their currencies because they don’t want to abolish their currencies.

Last week, Italian Prime Minister Mario Monti dramatically announced that Europe had “one week to save the euro.” This was shortly before a summit was held where leaders of Germany, France, Italy and Spain tried to hammer out a quick fix to stop what is likely to be a recession in the continent, one that it can ill afford to face coming as it does in the wake of the US recession that began with the sub-prime crisis of 2007-08.

ESM a real breakthrough?

This week, EU president Herman Van Rompuy announced that “a real breakthrough” had been worked out. The leaders agreed to prop up their currency with the creation of a European Stability Mechanism (ESM) which would directly provide fresh capital to the ailing banks within the region.
Whether the ESM becomes a lasting solution or just a palliative measure remains to be seen.

For now, the eurozone appears to have been pulled back from the brink of catastrophe. One stumbling block is the limited amount of funds that the proposed ESM will make available to the troubled economies of the region. Providing emergency or bail-out loans to Italy and Spain alone would deplete the 400 billion euros ($504 billion) allotted for the creation of the ESM.

The amount represents a mere 15 percent of the Italian and Spanish bond markets.

Philippines not far removed

The Philippines may seem far removed from the serious financial problems of the EU, but various experts warn that the country may not be spared the ill effects of a eurozone meltdown.

This is because the EU is the world’s third biggest economy after the US and China. With the globalized economy, the collapse of one could result in the collapse of all.

Newly-installed National Economic and Development Authority (NEDA) Director General and Socioeconomic Planning Secretary Arsenio Balisacan said any negative developments in the region could hurt the Philippine economy.

Balisacan said that Europe ’s economic crisis could affect the country’s economy in various ways, especially in terms of exports and remittances.

About 13 percent of Philippine exports go to European nations, while remittances from the region account for some 17 percent of total dollar inflows into the Philippine economy.

The NEDA chief added that borrowing costs would be more expensive because of the downgrading of credit-rating agencies in some of the banks across the globe.

Earlier, Moody’s downgraded 15 international banks citing the eurozone woes as one of the reasons for the slashed credit ratings of some of the biggest names in banking.

The 15 banks downgraded are the Bank of America; Barclays; Citigroup; Credit Suisse; Goldman Sachs; HSBC; JPMorgan Chase; Morgan Stanley; Royal Bank of Scotland; BNP Paribas; Credit Agricole; Deutsche Bank; Royal Bank of Canada; Societe Generale and UBS.

International institutions like the World Bank said that the impact of the slowing down of the economies of Europe will have a cumulative effect on the Philippines.

The WB had also cut its projection for Philippine economic growth in 2012 to 4.2 percent, should the economic slowdown continue

The WB said that the Philippines should first address the key impediments to accelerating inclusive growth through strengthening public financial management. The WB added that the Philippines needs to ramp up investments in infrastructure since the country has a big infrastructure deficit.

A banker’s perspective

Antonio Moncupa, East West Bank president and CEO, prefers to look at the worsening eurozone crisis as a half full cup.

“That the European markets, particularly the eurozone, will collapse in the next three months is, in my view, a very aggressive reading of the situation,” he told The Manila Times.

“While the problems are enormous, it is not impossible to think that a solution will be found,” he said.

Moncupa sees a global rather than a regional solution to the problem. He said it is likely that developed countries outside the EU could boost “the International Monetary Fund’s ability to intervene.”

He said the complexity of the eurozone problem was difficult to fathom. There are, according to Moncupa, “a thousand questions that beg answers.” Among them are:

* What happens if you have a German bond in euro and the currency imploded? Will the German government revive the deutsche mark, and then will you get paid in euro or in deutsche marks (DM)? If in DM, what will be the exchange rate?

* What if several counties remain in the single currency and the others get back to their former national currencies, what happens to the euro debt holders of those countries which get back to their legacy currencies?

* How about the banks which will surely face a run and move towards so-called safe havens?

The biggest banks in the world have huge amount of exposures in Europe, either debt, equities, and for sure, huge amount of derivatives. What happens to trade?

* The rest of the world holds a considerable amount of euro currency, debt and equity portfolios, what happens to those investors? If they lose money, what happens to the world capital markets?

“While it appears that our country is not much directly related to the eurozone markets, there are still some amount of trade that will be affected. We also have a meaningful number of Filipinos working in Europe. If our trading partners get affected, demand for our exports and supply of our imports will also get affected. In this day and age of a liberalized and a more interdependent world, it is hard to imagine that any country will escape a European collapse unscathed,” the East West bank president said.

ADB insight

Jayant Menon, the Lead Economist of Trade and Regional Cooperation at the Office of Regional Economic Integration of Asian Development Bank, says that although the eurozone crisis persists, the Philippines will be less affected than the ASEAN (Association of Southeast Asian Nations) because the country is not among Europe’s primary trading partners. Their largest trading partners are China, US, Japan and Singapore, and “they are most likely to feel the effects of Europe’s current situation.”

The one negative effect the crisis might bring is the probable capital flight of wealthy Filipinos.

Menon says that Filipino investors might get nervous and move their money to safer havens, and this may cause the peso to weaken.

The chaos and panic resulting from the fall of the euro will cause investors to move their large funds into different currencies.

Menon thinks the US is still the safest place, and more likely than not, when options are limited and people are unnecessarily nervous, the US dollar is a safe ground.

Menon projects that towards the end of the year, the Philippine peso might settle at 40 to the dollar if the eurozone crisis does not rattle the economy too much. –Beting Laygo Dolor Managing Editor; Mayvelin Caraballo and Madelaine Miraflor Reporters; And Jhoanna Paula Ballaran And Sheila Mañalac, Manila Times