Last week, the PAP announced a S$150 billion deposit guarantee back by our reserves. The President used his 2nd key to unlock our reserves.
It is clear now that the PAP has no intention of using fiscal measures in case of a drawdown. As most people have suspected, a typical taxpayers bailout is politically sensitive. Moreover, fiscal measures like deficits, raising taxes or borrowing will become the babies of the PAP.
Wanting to preserve our credit rating is just an excuse (see point 4. below).
So, reserves have to be earmarked. Current liquid reserves must be set aside or some fixed reserves have to be converted to liquid ones.
A contingent liability is still a liability in every sense of the word. There is no free lunch and costs are involved.
1. Opportunity costs in the form of lower returns;
2. Social costs in the form of Singaporeans waging their nesteggs to guarantee the safety of capital for (foreign) deposit-holders in case a (foreign) bank fails;
3. Market distortion costs - a riskier foreign bank currently paying higher interest rates will attract more deposits when the risk element is levelled *. The guarantee is discriminatory to banks (especially local banks) with better standing; and
4. Credit deterioration costs - a contingent liability will have to be taken into account by any credit rating agency worthy of its salt.
(* Ultimately all banks will pay about the same interest rates during the guarantee period.).
