Fed's rate cut set to bring relief to emerging markets

Philippine bank Governor Amando Tetangco said the US Federal Reserve's decision to cut the interest rate it charges banks may help restore liquidity to the financial system and provide relief to emerging markets.

The move may "ease market pressures," Tetangco said in a mobile-phone text message yesterday. "A favorable outcome will tend to provide relief to emerging markets including the Philippines which, while having no significant exposure to collateralized debt obligations, have been affected by risk aversion."

The Fed on Friday unexpectedly lowered its discount rate, the rate it charges to lend money to banks, by 0.5 percentage point to 5.75 percent and acknowledged for the first time that an extraordinary policy shift is needed to contain the US subprime-mortgage collapse that triggered liquidity concerns and a rout of global stock markets.

The Philippine Stock Exchange Index slumped 12 percent last week, erasing more than US$10.5 billion from market value.

Asian had their biggest weekly drop in 17 years last week before the Fed lowered the discount rate, as worries of a credit crisis prompted investors to shun riskier assets such as equities. The Morgan Stanley Capital International Asia-Pacific Index lost 8 percent, erasing all of this year's gains.

Economists the recent jitters reflected globalization, where the repackaged debt of struggling borrowers in the US is spread across the globe through institutional investors and hedge funds.

The fear for Asian stocks is that foreign investment funds will have to keep offloading shares to cover losses in the so-called subprime US mortgage market, and in the securities -- credit derivatives -- that are built on the back of it.

Until extent of that exposure is firmly established, credit could dry up and Asian markets suffer as a result, said Tai Hui (許長泰), an economist at Standard Chartered bank.