IN the course of his campaign to paint China as an evil empire, Supreme Court Senior Justice Antonio Carpio has claimed that the Philippines had defaulted on its loans in 1983.
He said this is a precedent that if government defaults on its borrowings from China for the Chico River dam project, the Chinese can seize Philippine assets, probably even the gas-rich Reed Bank.
That is so absurd.
Carpio is so totally ignorant of international loan agreements, and what happened in 1983, that bankers are laughing at him. More likely, he is deliberately lying for his agenda that is becoming clearer every time he opens his mouth. This is to stoke the embers of the centuries-old anti-Chinese racism among Filipinos so as to force President Duterte to move away from China and instead, as his predecessor did, be a vassal of the US.
I know in detail what happened in 1983 because I covered daily for two years as a senior reporter of the Business Day newspaper the unraveling of the debt crisis at the time, when Carpio claimed the Philippines “defaulted” on its loans.
It is astonishing that for a former corporate lawyer, and Supreme Court justice, Carpio doesn’t seem to know that in international loans, “default” is a precise legal term. It is an event that occurs when the lender declares that the creditor has failed to pay its interest payments (or the loan principal) on time, and beyond a grace period stipulated in the loan agreement.
There is a precise meaning for “default” because it’s a financially catastrophic event for a country for even a single bank, to declare a government or any of its entities in default.
It means such things as other banks refusing to extend any more loans and bank advances, even letters of credit to that country, the raising of interest rates on its long-term instruments, and the fall in the yield of its bonds.
Obviously, Carpio’s idea of a default is based on his experience as a corporate lawyer running after a defaulting company’s assets for a bank.
There is even a formal feature in international loans that reflects the global banks’ wiliness, which they invented in the 1970s to make sure that countries pay for their loans — since banks can’t really foreclose on properties of a sovereign nation that doesn’t pay is debts, except by having its government invade it militarily. (This happened in 1902 when Britain, Germany, and Italy imposed a blockade on Venezuela when it refused to pay on its foreign obligations.)
This is the so-called “cross-default” provision contained in most foreign banks’ and institutions’ loan agreement with a debtor country. This means that if a country defaults on its debt to one bank, it automatically puts it in default in all its other loans. That means obviously a financial meltdown for the country.
A bank would hesitate to declare a country in default for another serious reason: It would have to book that debt as a bad loan, and its forgone interest income booked as losses.
Because of this, while there have been a few cases in the post-war era when countries missed their debt payments, the most recent being Greece in its IMF loans in 2015, creditors prefer not to declare a country in default, and instead refer to it as “delays” in payments, and negotiate for the rescheduling of the debts.
Anyone with a modicum of knowledge on the features of international loans would see that his story of China garnishing Reed Bank if the Philippines “defaults” on its loans is Carpio’s pure horror scare.
The only extremely unlikely scenario if we are unable to service this China loan (and for whatever allegedly onerous default loan provision to take effect) is when the country is in such deep foreign-exchange crisis, government cannot get the foreign exchange to service all of its loans. In that scenario, we will have much, much bigger problems then what Carpio supposedly fears as the garnishment of the Reed Bank.
If ever we are declared in default by China, the Chinese wouldn’t even have time to do the papers garnishing Reed Bank. All global banks would have stopped its trade credits, short-term loans, and other foreign exchange remittances to the Philippines that we would be in total financial Armageddon.
Contrary to Carpio’s claims, no foreign bank or state financial institution has ever declared the Philippines in default, even during the debt crisis in 1983.
During that period when we could not service our foreign exchange loans because we run out of dollars for various reasons: the 1979 oil crisis that bled our foreign exchange reserves to pay for petroleum imports; the outbreak of the global debt crisis of 1982 when Latin American countries couldn’t pay their loans which raised global interest rates to unheard-of rates; mismanagement by Marcos technocrats of our foreign debt build-up; and of course the worsening political instability due to the assassination on Aug. 21, 1983 of Ninoy Aquino.
The central bank at the time even fudged our foreign exchange reserves to fool the global financial community that we could service our loans — which, however, was uncovered by media, making things worse for the country.
The country averted a declaration of default by banks after Marcos’ technocrats got our foreign creditors to instead agree to a 90-day “moratorium,” also called a “standstill agreement,” that allowed the Philippines to temporarily stop servicing its loans, while a “rescheduling agreement” (to push back the maturity dates) was being negotiated.
Of course, the “moratorium” led to our worst economic crisis, as foreign banks naturally refused to give additional short-term credit to service our loans, and to even open letters of credit. Our GDP plunged by 7 percent for each year in 1984 and then in 1985 — which loss in the economy was recovered only after 10 years.
Surprisingly though, but at a huge cost to ordinary Filipinos, the economy started to recover in the second half of 1985 that Marcos was confident enough to agree to the US demand that he call for a snap election in December that year. It was a brilliant US machination.
It is astonishing that Carpio is ignorant of these facts. Or he is merely taking advantage of his credibility as a Supreme Court justice and fooling Filipinos into suspecting and hating the Chinese. He has also been falsely claiming that the Chinese loan for the Chico Dam project has “onerous sovereign immunity” clauses when these are standard clauses that lawyers require in loan documents. (See table.)
What has happened to the quality and integrity of our Supreme Court justices?
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