Downtrend

More and more it seems like the global financial architecture is a bridge ready to fall.

There are enough Greeks, for instance, who actually believe they could walk out of the Eurozone and survive. That is a delusion fueled by dislike for the painful measures required to put this country’s house in fiscal order. The political Left in Greece, in a most opportunistic way, is trying to convince citizens that returning to the drachma is a silver bullet to end all the travails that decades of extreme addiction to subsidies brought about.

After many months in denial, Spanish authorities finally admitted their banking system was in trouble. Last month, they asked the European Central Bank and the IMF for a $100 billion bailout package to save the Spanish banks used as some sort of pork barrel by the country’s politicians for decades.

Consequently, interest rates for Spanish bonds spiked to over 7% — considered the critical threshold that will make European public borrowing unsustainable. Everyone now expects Spain to seek an even larger bailout package to save the entire economy from default.

Should that happen, the Iberian country will, like the others, look to Germany for its financing needs. That possibility led credit rating agencies to downgrade Germany’s outlook to negative. The downgrade for the most disciplined European economy sent a chill down the investors’ spines.

With Greece on life supports, Spain teetering on the brink of default and Germany’s ratings downgraded, the stock markets reacted with a passion. This week, US stocks slumped dramatically. The event reflects both the disturbing developments in Europe as well as the Fed’s Ben Bernanke warning that the US itself could fall off the fiscal cliff.

The US is more heavily indebted than any European economy. The only other country more grossly indentured than the US is Japan — although the once powerful Asian economy borrows from its own banks, causing the recession that gripped this economy for years. Bernanke warns that unless American policymakers find the political will to reverse the borrowing trend soon enough, the sheer arithmetic of servicing the outstanding public debt will cause the US to implode.

Adding to the sense of gloom in the markets is the deceleration of China’s growth. The world’s second largest economy depends on selling goods to the rest of the world. With the ring of recession tightening in Europe and with the US facing economic stagnation, China’s manufacturing will have to slow down.

The only thing that could possibly keep China from slowing down too quickly is the drive up domestic demand in this populous country. That, too, is a tough ask: it will threaten to drive up inflation and, with it, public discontent.

The Philippines so far managed to ride out the global financial turmoil because of remittances from our foreign-based workers as well as the dramatic growth of our BPO sector. Although we have the smallest investment inflow in our part of the world, remittances and BPO incomes generated enough domestic demand to sustain our economic expansion.

Should the epidemic of recession spread, however, the sources of hard-earned remittance inflow could be restrained. With little else other than those inflows to sustain our economic growth, we too could be held back.

Arbitration

Tourism is a third source of foreign exchange inflows for our economy, possibly compensating for any decline in worker remittances and BPO incomes. The growth of the tourism sector is hampered, however, by our famously backward infrastructure as well as our chronically chaotic bureaucracy.

A case in point is the stalled development of the Camp John Hay facility in Baguio. We have been treated, the past few months, to a high-profile spat between the BCDA and the privately owned Camp John Hay Development Corporation (CJH DevCo).

The dispute broke out when the BCDA accused CJH DevCo of failing to pay lease rentals amounting to about P3 billion. For its part, however, the private company says that the rentals cannot be collected because the BCDA failed to live up to its contractual obligations to its private partners.

Like most things in this country, the dispute ended up in court instead of being settled in arbitration as the contract between the two parties itself specifies. That could take years to resolve and so much economic opportunity for the City of Baguio to be lost.

Recently, in a case of wisdom from the bench, Judge Cecilia Archog of the Baguio RTC issued an order compelling the BCDA to submit the matter to arbitration. CJH DevCo had long indicated its preference for this means of resolving the dispute. The question now is whether the BCDA will obey the judicial order and join its counterparty in the most feasible means for resolving the problem.

The sooner this matter is submitted to arbitration, the better the prospects a mutually beneficial compromise might be found. This will enable the rapid development of the facility and add more tourism infrastructure to support the growth of this rising economic sector.

The BCDA has so far maintained a rather dogmatic attitude towards the dispute, indulging in a smear campaign against its private counterpart. That is illustrative of the sort of pigheadedness that stalls the development of many of our key economic sectors.

It will do out tourism industry well for the BCDA to submit to the wisdom of the bench in this case and seek early resolution of the dispute by means of arbitration.