Financial Trouble

The Global Financial Crisis: Responding to the Challenges

By: Arnel S. Oroceo

According to Professor Winnie Monsod, in the GMA-7 News and Public Affairs television documentary, “Walang Pera” featuring actress Ms. Marian Rivera and hosted by Mr. Mike Enriquez, which aired last March 22, 2009, “the global financial crisis of 2008–2009 resulted from a combination of stupidity and greed.”

It stemmed from the US housing crisis. This started when banks began to grant housing loans even to those who had lesser ability to pay. They called these sub prime mortgages. According to Wikipedia, “the term sub prime often correlates with non-conforming loans, or those that do not meet the guidelines. Those guidelines may be the size of the loan, a high debt-to-income ratio or lack of income documentation provided… Sub prime borrowers are more likely not to pay the money back, such as those who have a history of not paying loans back, those with a recorded bankruptcy, or those with limited debt experience.”

The most intriguing question is, considering the strict requirements that banks and financial institutions demand from borrowers, why a bank would grant a loan to someone who has a lesser ability or probability to pay. It does sound stupid.

Experts believe that government policies before the occurrence of the crisis encouraged this high risk lending practice. The reason for this was that the increase in loan incentives such as easy payment terms and the anticipated increase in housing prices encouraged borrowers to assume high-risk mortgages thinking that they could easily refinance these loans later at favorable terms. However, the problem broke out when interest rates increased instead and housing prices started to drop by 2006 and 2007. Refinancing became unviable which caused default in payments and foreclosures. Wikipedia says, “During 2007, nearly 1.3 million US housing properties were subject to foreclosure activity,” which was a 79% increase from 2006.

Now banks, thrifts in particular, approved too many high-risk loans because they used these sub prime mortgage papers to acquire more capital infusions from bigger financial institutions as mortgage-backed securities (MBS). It has been a practice in the US during the past 60 years for lenders to sell the right to receive payments on the mortgages that they issued through the process called securitization. They called the resulting securities mortgage-backed securities. However, the strategy backfired. Due to the widespread mortgage delinquencies, which resulted to foreclosures, these MBS had lost their value, which resulted in a heavy decline in capital of many banks and financial institutions. Wikipedia revealed, “Major banks and financial institutions had borrowed and invested heavily in MBS and reported losses of approximately US$435 billion as of 17 July 2008...” This caused a credit crisis in big financial institutions in the United States and Europe, which also caused a chain of economic slow down worldwide. Several large United States-based financial firms underwent conservatorship (or the temporary legal control by government of private corporations). The insolvency (or the inability to pay debts) of more companies in the US yielded to a recession and a decline in stock market prices around the globe, which further aggravated the crisis.

The Lehman Brothers declaration of bankruptcy shocked the world. Financial analysts considered it as the symbol of the global financial crisis. Lehman Brothers announced on September 14, 2008 that it would file for bankruptcy after failing to secure a financial support facility from the Federal Reserve Bank. After Lehman Brothers, Merrill Lynch was sold to the Bank of America. Then the American International Group (AIG) announced its liquidity crisis following the downgrade of its credit rating.

The United States went to a shocking economic recession. Who would think that the remaining super power in the world such as the United States of America would still be vulnerable to economic mishap? Apparently, no one could deny the connection of many of the world’s economies with the US market. The US recession, therefore, initiated a global economic crisis. When America sneezed, the world fell ill.

The ill effects of the global crisis did not exempt the Philippine economy. According to the documentary, in garments alone, 7,303 laborers lost their jobs. Peninsula Fashion in particular had 60% reduction in orders from the USA thus, they needed to cut to half their labor force, from 1,000 to 500 sewers. Many of their clients went to Vietnam and Cambodia because of cheaper labor pay. Coconut exports to USA, Europe and Asia Pacific went down from $US717 to $US610. The Federal Express closed its operations in Subic Economic Free Port Zone. Nineteen (19) companies in the Cavite Economic Zone shut down their operations, which affected almost 2,000 employees. Intel Company shut down operations as well. Fujitsu Company Philippines lay off 1,700 employees and Japanese Shipping companies would lay off an estimated 40,000 Filipino seafarers according to a news item from GMA Radio-DZBB. Four thousand and one hundred ninety seven (4,197) factory workers in Taiwan had lost their jobs.

Insurance companies also absorbed a large impact from the global economic crisis. Philam Life Plans, a subsidiary of AIG was sold late last year. Prudential Life Plans and Permanent Plans were the latest injured companies.

However, experts say that the Philippines is one of the least affected by the crisis. The most that we could expect is an economic slow down but economists still project a 2%–4% economic growth in 2009. There were sectors though that ask, “Is the Philippines one of the least affected by the global crisis because of its strong economic fundamentals and could easily take the blow or just because it is not predominantly involved in the chain?”

According to Professor Winnie Monsod, the standard medicine for the financial crisis is a “stimuli package” that the government would put into the different affected sectors. The idea is to restore confidence in the market.

According to an article at bayan-natin.blogspot.com, “The National Economic and Development Authority (NEDA) has unveiled a P300-billion economic resiliency plan that would pump prime the domestic economy this year… Socio-economic Planning Secretary and NEDA Director-General Ralph G. Recto said that the plan which is the country’s own stimulus package... in response to the global economic crisis… The government also created a "payback package" for OFWs who were retrenched due to the global financial crisis. This package includes the setting up of a P250-million support fund, skills training to avail of in-demand jobs in other parts of the world and setting up of Department of Labor and Employment (DOLE) and Overseas Workers Welfare Administration (OWWA) desks in the provinces to match OFWs’ skills with available jobs.”

The Philippine government admits its need to achieve a better tax collection this year. Presently, the government relies on Overseas Foreign Workers remittances that have reached $US14B in 2007 and have gone up to $US16B last year 2008 and proceeds from the Expanded Value Added Tax. The Social Security System has provided the P250M support fund as a loan to the government.

The US economic reforms began with the signing of the US$787 billion Economic Stimulus Bill by President Obama last February 17, 2009. The rest of the worlds’ governments went along with their own economic stimuli packages. According to Wikipedia, “…China cut its interest rate for the first time since 2002. The Reserve Bank of Australia injected nearly $1.5 billion into the banking system, nearly three times as much as the market's estimated requirement. The Reserve Bank of India added almost $1.32 billion, through a refinance operation, its biggest in at least a month …The 2008 Chinese economic stimulus plan is a $586 billion stimulus package announced by the central government of the People's Republic of China in its biggest move to stop the global financial crisis from hitting the world's third largest economy. A statement on the government's website said the State Council had approved a plan to invest 4 trillion Yuan ($586 billion) in infrastructure and social welfare by the end of 2010. The stimulus package will be invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income-building, tax cuts, and finance… In Taiwan, the central bank on September 16, 2008 said it would cut its required reserve ratios for the first time in eight years. The central bank added $3.59 billion into the foreign-currency interbank market the same day. Bank of Japan pumped $29.3 billion into the financial system on September 17, 2008 and the Reserve Bank of Australia added $3.45 billion the same day…”

For the average Filipino wage earner, life has been financially difficult these recent years and the global financial crisis has placed a heavier weight on his shoulders. The challenge is to survive the crisis like walking through fire and come out unscathed.

There are case studies that the documentary “Walang Pera” has presented. One is about a man who lost his job but has found a new means of earning a living by selling coconut in the University of the Philippines grounds. He earns P800.00 a day. Another case is about an OFW who lost her job in Italy and has returned home. Being unemployed, she has thought of venturing in a franchising business in a mall. Now, she is doing well. However, there are cases that have exposed troubling condition among low-income laborers. Since they could not find new jobs, they have to venture into small retail business like selling eggs to survive but they could hardly make ends meet with their earnings. From the P10,000 they earn as laborers, they have to settle with more or less P500 a week that they get from selling eggs.

One does not need a global financial crisis to get into a deep financial trouble. He does not even have to be unemployed. The challenge of the global crisis is how one can come up with a good personal financial management plan that could give him the luxury of financial independence and at the same time could provide a sort of personal stimulus package for any future economic slump that could be way beyond his control.

A P E R S O N A L P O R T F O L I O W E B S I T E