Secretary of Finance Cesar Purisima urged the United States Congress to quickly reach an agreement to raise the US’s borrowing limit, against the possibility of global economic disaster.
“It is crucial for the members of the US Congress to reach an agreement on the debt ceiling not just for their own country, but for the entire world. The world’s largest economy is now on the brink of default for no reason other than political posturing in Washington,” Purisima said.
“It is almost as if they are arguing about how to unlock a bank vault with a live bomb. If they cannot make a deal in time, it will blow up in their hands and take the world’s economies with them.”
The US Treasury has said that the time at which the US will reach the debt ceiling, currently set at $16.7 trillion, is October 17. This is the last day when the US will be able to meet all its obligations in full and on time given normal operations and given that all legal and prudent accounting measures have been exhausted. Should the US reach the limit on its borrowings, it would then exhaust any available cash reserves to meet obligations, and it would be forced to choose whether to honor its outstanding obligations selectively, or to dramatically cut spending to meet all its liabilities. If it chooses not to honor certain obligations, the US could be ruled as being in default.
The DOF Secretary warned that if the fiscal debate in the United States regarding the Patient Protection and Affordable Care Act, or the US health insurance reform law more popularly known as “Obamacare”, interfered with negotiations on raising the debt ceiling, the world would face economic disaster on an unprecedented scale
“The US is in political gridlock, failing to reach an agreement over Obamacare – a healthcare reform affecting 313 million people. However, their Congress has to realize the implications of defaulting on $12 trillion of outstanding debt, almost twenty-three times the $517 billion in debt which forced Lehman Brothers into bankruptcy in 2008,” Purisima said.
“According to the IMF, a US default can drive US long-term rates up by as high as 2%, crash US equity prices by 27%, and weaken the dollar by 13%. They estimate US growth would likely be reduced by at least 7%. Emerging markets will see their growth blunted and Europe will be thrown violently back into recession. This is a nightmare scenario of the worst sort and I strongly urge the US political leadership to make all efforts to avoid this,” added Purisima.
DOF Undersecretary and Chief Economist Gil Beltran also noted that the Philippines would have to significantly revise economic planning, were the US to default.
“The Philippines would have to re-evaluate economic projections in light of a US default. For every percentage point rise in US interest rates, Philippine interest rates rise by 0.80 percentage point. Also, for every percentage point rise in Philippine interest rates, the Philippines loses 0.36 of a percentage point in real GDP growth,” Beltran said.
“Fortunately, thanks to our strong and structural current account surplus, which was at 4.4% of GDP for the first half of the year, the Philippines has room to offset these negative effects through monetary and fiscal stimulus.”