More On BSP's $1-B loan to IMF as Part of the EU Bailout

Recently I commented about the immorality of the Philippine government’s participation in the bailout of the Eurozone through the IMF.

There are two issues more I want to add.

Because international reserves from the local central bank, will be used to finance the loan to the IMF, there is this notion that tax money isn’t involved.

First of all the Bangko Sentral ng Pilipinas (BSP) is a creation of the Congress via REPUBLIC ACT No. 7653 or the THE NEW CENTRAL BANK ACT

The law says

Section 1. Declaration of Policy. - The State shall maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit. In line with this policy, and considering its unique functions and responsibilities, the central monetary authority established under this Act, while being a government-owned corporation, shall enjoy fiscal and administrative autonomy.

Section 2. Creation of the Bangko Sentral. - There is hereby established an independent central monetary authority, which shall be a body corporate known as the Bangko Sentral ng Pilipinas, hereafter referred to as the Bangko Sentral.

The capital of the Bangko Sentral shall be Fifty billion pesos (P50,000,000,000), to be fully subscribed by the Government of the Republic, hereafter referred to as the Government, Ten billion pesos (P10,000,000,000) of which shall be fully paid for by the Government upon the effectivity of this Act and the balance to be paid for within a period of two (2) years from the effectivity of this Act in such manner and form as the Government, through the Secretary of Finance and the Secretary of Budget and Management, may thereafter determine.

Since the BSP is a government-owned corporation, then the Philippine government stands as an explicit guarantor of the BSP.

There has been a precedent to this.

Central Bank of the Philippines, the predecessor of the BSP, suffered massive losses to the tune of an estimated Php 300 billion as consequence of the series of bailouts provided by then President Cory Aquino to her favorites.

The losses were eventually transferred to the central bank board of liquidators.

This from an ADB study,

In 1993, the new Central Bank Act was approved. This law aimed at ensuring the independence of the conduct of monetary policy from political interference. It also provided for the recapitalization of the central bank and the transfer of over P300 billion worth of losses of the old central bank to a board of liquidators. The new central bank is now known as the Bangko Sentral ng Pilipinas (BSP).

The board of liquidators constitutes an ad hoc government agency (Philippines Executive Order no. 141 Reconstituting the Central Bank Board of Liquidators) headed by the President of the Philippines, and whose other board members include members of the monetary board, Department of Finance, Department of Budget and Management and an executive director nominated by the board.

This means that the losses of the old central bank has been carried over to the Philippine government (at taxpayer’s expense)

The Point is: ALL actions by the Bangko Sentral ng Pilipinas, as a government agency, are underwritten by the taxpayers.

And the second point is that no matter the complexity of the structure of political institutions, in essence, government survive from taxes, central banks notwithstanding.

Another idea is that $1 billion represents a small fraction of the BSP’s portfolio.

This has ethical, institutional and behavioral implications.

First the EU crisis exists because there hardly has been any private sector willing to finance insolvent institutions. Only governments, through the use of badges and guns on their citizenry, have been willing to finance them.

This means that the risks to loans for bailouts are REAL.

As Professor Arnold Kling rightly points out,

For private debt issued within a country, creditors have recourse to the court system to try to recover their money. But there is no court with the power to force the government of Spain to pay anything to its creditors. So, even if the German government, in order to "save the European union," agrees as an agent for its citizens to buy existing Spanish debt at par in exchange for new debt worth 70 cents on the euro, how can we be sure that Spain will pay off the new debt?

In short, governments recklessly expose people’s money to greater risks, and worst, they do this even without the public’s consent.

Next is that a billion here, a billion there, pretty soon, you're talking real money, it’s a quote attributed to the late US Congressman and Senator Everett Dirksen. This means governments freely spend or allocate other people’s money without compunction.

Of course there will always be the issue of opportunity costs or money spent on the EU through IMF could be used for other political expenditures.

Finally, bailouts leads to more bailouts as what we are seeing today. Eventually the accumulation of debts from all these, in the HOPE that bailouts will produce the intended effect, will lead to systemic fragility, which risks dragging along the entire world into a black hole.