inflation from its already low level. in these circumstances, monetary policy is able to be more patient. that said, no central bank can ever afford to be less than vigilant about the prospects for inflation. * * * the foregoing relatively optimistic short - term outlook for the u. s. economy is playing out against a backdrop of growing longer - term concern in financial markets about our federal budget. as you know, the congressional budget office is projecting that, if current policies remain in place, the unified budget will post deficits throughout the remainder of this decade - a sharp turnaround from the large and growing surpluses projected just a few years ago. given the events of the past three years - the economic downturn, the retrenchment in equity markets, the increased need for spending on homeland security, and the wars in afghanistan and iraq - some deterioration in the federal budget balance was probably unavoidable, particularly in the short term. one source of deterioration - the buildup of a larger military force structure - will not persist indefinitely. merely maintaining a given force structure rather than increasing it will remove an important factor driving the deficit higher. of course, the deterioration in the fiscal balance has already increased the level of debt relative to gdp, and thus has elevated the starting point from which policymakers will soon have to address the budget implications of the impending retirement of the baby - boom generation. recent budget deliberations are not encouraging. the current debate appears to be about how much to cut taxes or how much to increase spending. no significant constituency seems to support taking the actions that will be necessary to move toward, and one hopes achieve, budget balance. in retrospect, the emergence of budget surpluses in the late 1990s eroded the discipline that emerged as a consequence of the earlier fear of ever rising and, hence, potentially destructive deficits. indeed, many of the rules that helped to discipline budgetary decisionmaking in the 1990s - in particular, the statutory limits on discretionary spending and the so - called paygo rules - were allowed to expire. many analysts properly continue to be concerned that, without these enforcement mechanisms and the fundamental political will they signal, the built - in bias in favor of red ink will once again become entrenched. policymakers have become all too aware that government spending programs and tax preferences can be easy to initiate but extraordinarily difficult to shut down once constituencies develop that have a stake in maintaining the status quo. the now -

##preciated when talk of lehman ’ s difficulties took center stage. this is evident the day after lehman filed for bankruptcy protection as market uncertainty set in. yet in the same vein, that uncertainty abated and the peso appreciated once the rescue plan of the us fed and treasury was announced. looking at check clearing activity for that particular week, we find no evidence of either abnormal or sharp reactions. in fact among universal and commercial banks, there was a net check deposit of roughly php970 million on the 16th and 17th of september – the period of lehman ’ s filing for chapter 11 – followed by a net check withdrawal of basically the same amount on the 18th. in effect, resources were not withdrawn on balance as a result of lehman ’ s difficulties and commercial / universal banks even closed the week with further additions. over at the interbank market, average rates remained relatively the same as well throughout the same period. where the market response was most evident was in the pricing of the credit risk. one can see from the chart that the embi + indices, both global and for the philippines, rose immediately after september 16. the same pattern is evident in our 5 - year credit default swaps, suggesting that it became more expensive to hedge against the possibility of a philippine default. however, we would like to stress that those spikes have likewise abated, again once the market absorbed the information on the rescue plan. assessing our market landscape what we are suggesting mr. chairman is that our own market ’ s reaction has been relatively subdued despite the otherwise historic developments offshore. we attribute this to our own structural make - up specifically. a banking system where institutions are well - capitalized relative to the risks they take on their balance sheet. our latest capital adequacy ratio ( car ) for universal and commercial banks is practically 50 percent higher than our prudential standard of 10 percent which is itself higher than the international standard of 8 percent set forth by the basel accord. the continued asset clean - up of banks, accomplished through market - oriented schemes and without the use of public funds, has boosted the banking system ’ s overall asset quality. the banking system ’ s npl ratio is now closer to the pre - crisis level of around 4. 0 percent. furthermore, return to equity continues to improve, currently at 10. 8 percent as of end - 2007 investing in banking reforms these strengths have been made possible because we have invested in previous reforms. while recognizing that change is itself difficult, we