The Cost of Currency Intervention: BSP Recapitalization by Issuing Bonds

Everything action comes with a cost, and so it is with the currency intervention measures administered by the local authorities to restrain the Peso's appreciation.

According to the Philippine Daily Inquirer, ``In the period from January to November last year, the BSP incurred P84 billion in foreign exchange losses leading to a P62.5 billion in net loss. The amount was charged by the BSP against the capital accounts built over the years.”

The consequences…the domestic central bank, the Bangko Sentral ng Pilipinas (BSP) plans to recapitalize by issuing bonds, again from the Inquirer, ``Inquirer sources said the scheme would be announced in the next few days. They said the government recognized that the BSP recapitalization was an urgent matter now that the central bank was incurring huge foreign exchange losses. To avoid imposing heavy burden on the government’s finances, in view of its bid to wipe out fiscal deficits and achieve a balanced budget this year, the government is favoring the bond issuance scheme, proceeds of which would be used to recapitalize the BSP.”

``The scheme will enable the BSP to get the money immediately this year while the cost burden on the government will be staggered over a 10-year period.”

Now this assumes that the Peso won’t have to be supported further…