WHAT MEDIA AND THE PUBLIC DID NOT KNOW IN THE ASIAN CRISIS--
THE BEHIND-THE-SCENE STORY OF HOW BSP MISMANAGED THE CRISIS:
BSP WAS URGED SINCE APRIL 1998 TO ENFORCE CURRENCY SPECULATION CONTROL
THAT TURNED OUT LATER AS ITS OWN CIRCULAR NO. 138--WHICH COULD HAVE
AVOIDED BAD-LOAN PROVOKING HIGH INTEREST RATES--BUT IT EVADED DOING SO
FOR AS LONG AS IT COULD--OR UNTIL AUGUST 2001--BECAUSE THE MAIN
SPECULATORS ARE CODDLED BANKS UNDER ITS DIRECT SUPERVISION?
THOSE WHO CANNOT REMEMBER
THE BIG HOAX HIGH-INTEREST-RATE CURE
ARE CONDEMNED TO REPEAT IT
In the country’s most severe post-war economic crisis in 1984-1985, the old Central Bank of the Philippines promoted high interest rates of 40% or more that caused 20% bad loans and the bankruptcies not only of many borrowers but also of the central bank itself.
In the 1997-1998 Asian crisis, the new Bangko Sentral ng Pilipinas (BSP) activated high interest rates of up to almost 40% that caused roughly 30% bad loans and the bankruptcies of many borrowers, though not of BSP because it was already restricted by its charter from conducting the destructive open market operations of the old central bank.
In the event of a next unpredictable economic crisis--which nobody can totally discount under the present export-import of economic crisis among nations under globalization--what is the public’s assurance that BSP, managed today by practically the same group that orchestrated more than 30% high interest rates in the Asian crisis, will not repeat the use of economic-folly HIGH INTEREST RATES in the next crisis?
CENTRAL BANK CHIEFS FROM AROUND THE GLOBE
FAILED TO FIND THE ELUSIVE SOLUTION TO CURRENCY SPECULATION
To address the economic disasters and injustice from the raising of interest rates just to indirectly DISCOURAGE DOLLAR SPECULATION, high-interest-rate alternatives have to be found. However, IMF claimed in 1998 that there were no alternatives to high interest rates during the turbulence (Puzzlers/Economic Sting, p. 15). Thereafter, from an AP news dispatch, the Philippine Daily Inquirer came out with the following banner business story on the meeting of central bank chiefs in Hong Kong in January 1999: “Central bankers from around the globe have found no immediate solution to a question that has troubled Asian leaders for nearly two years: How to control currency speculators.” (“Central bankers share gripes on speculation,” Philippine Daily Inquirer, January 13, 1999, page B5).
WHERE LIES THEN THE SOLUTION TO CURRENCY SPECULATION?
Actually, the salvation of Asian economies from currency speculation rests on the promulgation of DIRECT CONTROL MEASURES that involve preventing the speculative transactions at the point of execution, running after the speculators, and punishing them as ECONOMIC SABOTEURS to the fullest extent of the law. They have to be punished because currency speculation is a form of economic sabotage that manipulates and impairs free market, with concomitant undermining of the exchange rate that harms the economy (p. 113).
THE BEHIND-THE-SCENE STORY
OF HOW BSP MISMANAGED THE ASIAN CRISIS
THROUGH RENEGING ON WHAT IT WAS MANDATED TO DO
Thus, even with my limited background on the Asian crisis derived from BSP’s reply to my January 1998 letters to it, under my April 1, 1998 letter personally transmitted to BSP on April 17, 1998, I already put forward to BSP the following recommendation designed to CAPTURE and PREVENT speculative dollar transactions in the financial system:
A “customized solution that will hit only the targeted DOLLAR
SPECULATORS…is the kind of solution that the public should get from
our BSP officials.... The ideal (high-interest-rate) alternative is
a solution that will attack the problem directly.... A more ideal
alternative then is to...go straight to DOLLAR PURCHASES and try
to identify those which can be for SPECULATIVE purposes only.
BSP may require SUPPORTING DOCUMENTS, such as PROOF of existing
DOLLAR OBLIGATIONS, for substantial dollar purchases done through
the banking system, so that those WITHOUT ACTUAL FOREIGN OBLIGATIONS
may be construed as intended for DOLLAR SPECULATION....”
Not knowing at the time that what I was recommending was in fact BSP’s own Circular No. 138 dated July 31, 1997, a copy of which I obtained from BSP years later only, and fearing that my suggestion might be interpreted as transgression of sacred FREE MARKET, I could not make more forceful recommendation. Thus I got the rebuff of now Deputy BSP Governor Diwa Guinigundo, who in his June 30, 1999 letter to me ruled that my suggestion was a CURE WORSE THAN THE DISEASE. Worse, I could no longer write BSP if now BSP GOVERNOR AMANDO TETANGCO, JR. would have his way. After citing in his November 24, 2000 letter to the Civil Service Commission--which wrote BSP in my behalf--my earlier 10 letters to BSP together with BSP’s voluminous (but belated and unsatisfactory--MLT) replies, he declared: “In spite of (these BSP replies) Mr. Tecson has continued to reiterate an essentially unchanged viewpoint. In view of the scarcity of resources available to
government and in the interest of making efficient use of the available resources, we in the BSP feel that sufficient attention has been given to Mr. Tecson’s concern and a proper rebalancing of effort and time must now be undertaken.”
(Note: Copies of the two BSP letters are shown in my book Puzzlers/Economic Sting, pp. 215 and 218-219, respectively. My rejoinder to now BSP Governor Tetangco, Jr. is shown on pages 220-221 of the book, which ended by saying: “I DIDN’T HAVE TO WRITE BSP...IF MR. TETANGCO, JR. WERE DOING HIS JOB.”)
As portrayed in my past emails, BSP bungled its job when it fallaciously promoted 30% high interest rates in July 1997, which went back to the old level some two years later, after wreaking havoc on victimized borrows. However, while interest rates have gone down, DOLLAR SPECULATION continued to plague the banking system--resulting in undue DEPRECIATION of the PESO--and it appeared Mr. AMANDO TETANGCO, JR., who did not want to receive any further unsolicited advice from me, WAS NOT DOING ANYTHING ABOUT IT, as suggested by lack of visible action from BSP.
Therefore, as part of the citizenry upon whom sovereignty resides, I had to write BSP again on December 18, 2000, then on February 18, June 30, and August 4, 2001. From my June 30 and August 4, 2001 letters (shown hereunder as ANNEXES A and B, respectively), can be gathered a brief HISTORY of how BSP--under then BSP Governor Gabriel Singson and later under the next BSP Governor--was repeatedly urged in writing to run all-out after GUILTY economic-saboteur dollar speculators in lieu of punishing INNOCENT borrowers and the economy through high interest rates, but BSP clearly EVADED doing so maybe because the main speculators were favored banks under its direct supervision. It is understandable that some BSP officials might not want to antagonize the banking system because it is where they hope to work as officers or consultants after their stint in BSP.
Under the circumstances, I simply cannot accept media's glorification of BSP officials (who could not even properly interpret their own Circular No. 138) as having managed well the Asian crisis, especially if we consider that, as presented in my next email, when BSP eventually took action against dollar-speculating banks in about mid-August 2001 pursuant to its Circular No. 138, the local currency suddenly appreciated, a proof that indeed BSP could have avoided--but did not, to its eternal discredit--the BIG HOAX IMF-prescribed HIGH INTEREST RATES, which unduly tightened money supply, dampened demand, worsened the business slump, and brought ruin to many borrowers that translated to problematical bad loans to banks, all at the expense of the economy and the public.
MARCELO L. TECSON
San Miguel, Bulacan
October 4, 2008
Cc through separate emails:
Selected executive & legislative government officials,
Highest BSP officials,
Selected members of media and academe,
professional & think-tank organizations,
civil society groups, concerned citizens, etc.
For: BSP GOVERNOR RAFAEL BUENAVENTURA
Date: June 30, 2001
Subject: ADDRESSING PESTERING DOLLAR SPECULATION....
“The Bangko Sentral…yesterday threatened to intervene in the market and scrutinize the daily foreign exchange transactions to stop the speculative attack on the peso.” (“Bangko Sentral warns speculators,” Philippine Daily Inquirer, June 23, 2001, page B1) BSP’s warning may not be good enough. If there is suspected dollar speculation that undermines the currency exchange rate, then BSP should immediately take drastic action against suspected dollar speculators, some of which may be banks under its supervision. In the past, BSP showed no qualms in inducing high interest rates that wrought havoc on the Filipino borrowing public, yet up to now it limits itself to threatening banks instead of actually taking measures--admittedly unpalatable to banks--despite the peso depreciating again to alarming levels. Hence, I hereby respectfully suggest the herein measures to BSP authorities, lest they mindlessly think again of raising interest rates
just to tighten money supply and fight dollar speculation.
(First:) In general, (BSP should) strictly enforce the recommended integrated dollar speculation control scheme mandated under long standing BSP circulars and communicated earlier to BSP. It consists of CAP IN BANK DOLLAR HOLDINGS, DOCUMENTATION REQUIREMENTS for DOLLAR PURCHASES by end users, and FORWARD COVER (exchange rate hedging) for foreign obligations. If BSP authorities will pay enough attention to the proper enforcement of the scheme, significant dollar speculation cannot be undertaken without being detected and stopped by them….
(On the concern that running directly after dollar speculators is VIOLATION of FREE MARKET)…the problem is…maintaining free-market peso-to-dollar conversion rate. To do that, to be truly PRO FREE MARKET, does NOT always mean DOING NOTHING and letting the…(exchange) rate seek its own level, that happens only in textbooks. In the real world, there can be things like price manipulation, cartel, hoarding, intentional cutback in production, and other unfair practices that destroy free market. Under any of these conditions, non-intervention means leaving the market at the mercy of market manipulators, thereby giving the public not the intended free market but a vitiated one.
DOLLAR SPECULATION is a form of market manipulation because it counteracts the free operation of the economic law of supply and demand. It creates an artificial increase in demand for dollars that results in dollar short supply and corollary depreciation of the local currency, resulting in an undervalued peso. Hence, all possible measures should be taken to curb all forms of dollar speculation, including taking the very FIRST STEP against it which at this late date has not been done despite my repeated recommendation since 1998--having it clearly PROHIBITED as an act of economic sabotage, with stiff sanctions to violators….
MARCELO L. TECSON, SR.
Note: Drastically abridged for brevity; original version received by the Offices of the BSP Governor and individual members of the BSP Monetary Board on July 9, 2001.
For: BSP GOVERNOR RAFAEL BUENAVENTURA
Date: August 4, 2001
SUBJECT: PRAY TELL, JUST WHERE IS THE PROBLEM IN STOPPING
With its vast powers, Bangko Sentral ng Pilipinas (BSP) can stamp out destructive dollar speculation in the banking system if only it will do everything to solve this pestering problem. Instead, for the entire duration of the Asian crisis and last quarter 2000 eco-political turmoil, it relied on HIGH INTEREST RATES in fighting currency speculation. It DID NOT RUN AT ALL AFTER DOLLAR SPECULATORS, a gross dereliction of duty of BSP because it PROTECTED instead of punishing harmful SPECULATORS, and PUNISHED instead of protecting productive investor-BORROWERS--which it could have avoided by simply enforcing its existing CIRCULARS against dollar speculation! I reiterated to BSP my suggested implementation of currency speculation control through my June 12, 2000 letter that it received on July 20, 2000. When it finally took some initial steps to implement it in August 2000, it found 20 banks, or about half the commercial banking system, in violation!
(“20 banks fined P1.2M for peso speculation,” Phil. Daily Inquirer, August 28, 2000, page B8)
From April 1998 up to June 2001, I repeatedly suggested to BSP the taking of CURRENCY SPECULATION CONTROL measures that can neutralize dollar speculation, such as the very first step of PROHIBITING it as economic sabotage, with severe punishment to violators; requiring PROOF of FOREIGN OBLIGATIONS for dollar purchases by the public, which will automatically disallow speculative purchases as these cannot be supported by the required proof--because there are none, these purchases are speculative precisely because these are merely for hoarding, there are no foreign obligations to be paid, therefore there are no available proof; as well as REDUCTION in CAP in BANK DOLAR HOLDINGS, which will nullify dollar speculation by banks and constrain them, instead of BSP, to unload resulting overbought dollar balances, thereby injecting LIQUIDITY into the foreign exchange market. After a long inaction, in its June 30, 1999 letter-reply, BSP rejected my suggestion
and condemned it as a cure worse than the disease (page 215).
At present, however, things are different. As reported in newspapers, BSP is instituting a penalty scheme against dollar speculation by banks that will complement the currency speculation control measures it activated in second half 2000 (“Bangko Sentral moves to penalize banks engaging in foreign exchange speculation; $ overbought cap to be cut,” Manila Bulletin, July 24, 2001, page B-1). In effect, BSP is already implementing what it mindlessly rejected in mid-1999--which turned out in 2000 to be essentially those mandated in its old circulars inherited from the defunct central bank--except that BSP is not doing it right.
BSP’s past punitive action against dollar speculation was ineffective because it was directed primarily against the INSTITUTIONS or banks that can very well afford the fines from their much bigger gains from dollar speculation, not against the PERSONS, the responsible bank officials who will be really hurt by permanent disqualification from office if not imprisonment. However, BSP’s graduated penalty scheme reported in newspapers on July 24, 2001 is still not harsh to banks--it will not hurt them at all the way high interest rates hurt borrowers during the Asian crisis and impaired their financial capacity to repay bank loans! Further, BSP indirectly admitted the potency of my proposed reduction in cap on bank dollar holdings when it reserved it as the ultimate punishment for more serious or habitual bank violations. However, in so doing, BSP unwittingly imposed upon itself the time-consuming burden of proving first such violations before it can
apply this potent measure on a preventive and timely basis, thereby sidelining it.
But why resort to MEDICATION when what is needed is drastic SURGERY? Why impose BEARABLE penalties that will NOT really deter speculation precisely because these are bearable? Why not prescribe UNBEARABLE punishment right for first time violators, so that unpatriotic bank officials will either stop their acts of economic sabotage or be disqualified permanently from office, ridding the banking system of their kind? Why have more QUALMS about stiff SANCTIONS to a few dollar SPECULATORS--which, in the first place, they can easily AVOID by not violating BSP regulations--than about the SUFFERING right now of victimized 76 MILLION FILIPINOS from greatly increased prices of goods and services as a result of continuing PESO DEPRECIATION, the evil impact of DOLLAR SPECULATION?
Unless BSP will take the very first step of having dollar speculators--not just banks but also non-bankers who may operate dollar black markets outside the banking system--punished severely as economic saboteurs, unless it will impose the permanent disqualification from office of erring bank officials and a million-peso daily fine (or whatever high amount is deemed appropriate) for each violation by banks right for first violations, unless it will reduce the cap on bank dollar holdings in fast reaction to a depreciating peso--without the self-imposed burden of proving first any suspected dollar speculation within the banking system--it means BSP IS NOT YET REALLY SOLVING DOLLAR SPECULATION!
The probability that BSP is indeed not really solving the dollar-speculation and corollary peso-depreciation problems the way it should be done can be deduced from an event this week. “The Bankers Association of the Philippines (BAP) said yesterday it had voluntarily agreed to reduce overbought limits on their dollar holdings (from the $10 million limit set by BSP) to $5 million or 2.5% percent of unimpaired capital, whichever is lower, effective today.” According to BAP, “there was enough dollar liquidity in the market but it was not evenly distributed.” It added that “by lowering the overbought limits, we are in effect addressing the uneven distribution by providing the market with additional pool of funds.” BAP’s “own…numbers suggest it will be substantial in terms of added liquidity.” (“BAP cuts dollar overbought cap,” Manila Bulletin, August 2, 2001, pages B-1 and B-2)
What more proof does BSP need to realize that it is not doing everything to fight dollar speculation and stabilize the exchange rate? In papers acknowledged received by BSP, I have repeatedly recommended to it since July 2, 1999 the REDUCTION IN CAP ON BANK DOLLAR HOLDINGS*** but to this day, it has not even commented on this particular suggestion in all of its letter-replies to me, let alone implemented it. Fortunately, what BSP should have mandated as a matter of its duty but did not do so--the proposed reduction in cap on bank dollar holdings--banks will do on a voluntary basis! BSP’s gross negligence is quite clear from BAP’s statement that there was enough dollar liquidity but the problem was uneven distribution, which could have been remedied by the said SUGGESTION since two years ago to BSP--but BSP is taking forever to do it.
*** Author’s Note: As reported later by media, BSP eventually followed the suggested reduction in cap on bank dollar holdings in March 2003, or one year and seven months after its receiving on August 7, 2001 this August 4, 2001 follow-up letter, and three long years and eight months after its receiving on July 2, 1999 the first of repeated recommendations to reduce bank dollar holdings during critical times. (“BSP limits banks dollar holdings, forward FX,” Manila Bulletin, March 14, 2003, page B-1.)
So, pray tell, just WHERE IS THE PROBELM IN STOPPING DOLLAR SPECULATION? At the risk of being called ignorant or immodest, I cannot see it. IF THERE IS A PROBLEM, IT IS BSP-MADE! IT IS RIGHT IN BSP’S HOLDING BACK--ITS IMPOSING BEARABLE INSTEAD OF UNBERABLE SANCTIONS--AGAINST BANKS ENGAGED IN SPECULATION or serving as its tool, resulting in persisting dollar speculation and the ever-present temptation to raise interest rates to uneconomical levels, as was foolishly done in the past, and may be foolishly done again soon!
As reported in today’s front page of the Philippine Daily Inquirer, to bring the currency exchange rate to PhP50 to the US dollar by year-end in quick response to President Gloria Macapagal-Arroyo’s urging, BSP Governor Rafael Buenaventura gallantly declared that “BSP…(is) prepared to raise interest rates….” (Martin P. Marfil and Clarissa S. Batino, “Gloria asks BSP to prop up peso to 50-to-$1,” Philippine Daily Inquirer, August 4, 2001, p. A1). But why should the borrowing public suffer from BSP’s continuing gross negligence in the taking of proper measures against dollar speculation?
If BSP disagrees to my proposition that there is no problem if only it will do what is necessary, will it please tell me where or what the problem is? Maybe, even if just maybe, I can suggest something now the way I did in 1998, when BSP took steps meant to ease high interest rates but "the prime lending rates of banks...remained RECALCITRANTLY HIGH," (subject of my 2nd email; pages 155-156 of Puzzlers/Economic Sting--MLT), a reminder to BSP to use more common sense in finding solutions to problems.
MARCELO L. TECSON, SR.
Note: Copies of the original signed version were transmitted to and acknowledged received on August 7, 2001 by the following: Office of BSP Governor and Monetary Board Chairman Rafael Buenaventura, Office of Secretary of Finance Isidro Camacho, and Offices of the following members of the BSP Monetary Board--Vicente Valdepenas, Jr., Melito Salazar, Jr., Antonino Alindogan, Jr., Juan Quintos, Jr., and Teodoro Montecillo; copy for DTI Secretary and concurrent Monetary Board member Manuel “Mar” Roxas II was slipped under the closed door of his unmanned office at BSP.