I recently read that not so long ago, debtors who were unable to pay their debts were imprisoned until they were able to. This doesn’t make sense really since how can you work and make money to pay when you’re behind bars? Supposedly, we have progressed beyond such medieval practices. But looking at Greece, you can’t help but wonder if we really have progressed much. Greece has a huge debt and is in risk of being unable to pay. So it needs to earn more (taxes), spend less (budget cuts), and borrow more. But lenders would only lend at a higher rate to reflect the increasing risk of default. This makes it harder to pay back the new debt. The European Community has also been providing bailouts in the form of cash and/or debt restructuring. But there are the strings in the form of austerity packages tied to the bailouts. These austerity packages include decrease in salaries/pensions, increase in tax rates, denationalizing companies, and selling government property. And again, these austerity packages, by possibly slowing down economic activity, makes it harder to pay back debt. Caught in this vicious cycle, you’d probably wonder if a prison cell is better.
Tag Archives: finance
Philippine Global Competitiveness
Read John Mangun’s article this morning and learned that the country rose 10 places in the World Economic Forum’s ranking to 75th. This despite the poverty level, corruption (PNoy is all talk and no walk on this), inefficient government bureaucracy, security issues (bus hostage-taking), inadequate infrastructure (where are the PPP projects promised by PNoy?), poor education, poor investor protection (NAIA3, PLDT foreign ownership), and the difficulty of starting a business. Personally, I think all these hostile factors contribute to leaving only the smartest and most resilient thus contributing to robust and sophisticated businesses. Supporting factors are good fiscal and monetary policy (BSP governor Tetangco got an “A” grade recently from a finance magazine), good banking industry, and a good stock market. That’s good news to start the day!
Full report here.
US Rating Downgrade
So S&P downgraded the credit rating of the US from AAA to AA+. What are the implications? I think, nothing. Rating agencies such as S&P might be applicable for companies and even governments but when you’re talking the US it’s different. Japan and China, with their huge holdings of US debt won’t really base their own rating and pricing from some rating agency. And in self interest, they certainly won’t simply let their holdings lose value which would be the case if yields rise due to the ratings downgrade. These large holders are the rating agencies when it comes to the US. Already Japan has indicated that their confidence is unchanged and China with it’s bigger holdings is likely of the same mind.
Bloodbath
Today was a bloodbath in the market. Everything was red. I was actually expecting it to go down but for the wrong reason. I was thinking that if the debt ceiling will be raised, and it was, then there would be a measure of recovery in the US market. It had been going down for some time due to uncertainty brought about by the prolonged debate on raising the debt ceiling. And once that uncertainty is lifted, I was thinking some capital would flow back. But it seems the reason for the bloodbath is that with the uncertainty lifted, the shape of the economy went fore into the picture and it wasn’t good. So downward the US market continued. Enough to jitter everyone else.
Debt Crisis
Despite it’s usefulness in certain cases, a lot of people just can’t seem to handle debt: your friend, your girlfriend, your neighbor, your company, even your country (e.g. Ireland, Portugal, or Greece). But when it’s the US, the largest economy in the world, that is at risk of defaulting on its debt, you take notice.
There’s nothing new in the US being in debt really. However, it has already reached the so-called debt ceiling. More easily understood as a credit card limit for really big spenders. Unfortunately, the government is spending so much that its salary can’t pay for its spending and its credit card bills without having to borrow. Talk about spending beyond your means.
So definitely the government needs to earn more (taxes), spend less (budget cuts), and if possible, get a credit line increase (debt ceiling). Coming from the recent recession, increasing taxes and decreasing spending to the level that there’s no need to borrow will be counterproductive. Thus, it hinges on borrowing more. All the discussion on the hill is more on how to best address the budget deficit: how to earn more and spend less.
But the ceiling has to be raised. If not, we’re screwed.