Uncertainty should not bother you. We may not be able to forecast when a bridge will break, but we can identify which ones are faulty and poorly built. We can assess vulnerability. And today the financial bridges across the world are very vulnerable. Politicians prescribe ever larger doses of pain killer in the form of financial bailouts, which consists in curing debt with debt, like curing an addiction with an addiction, that is to say it is not a cure. This cycle will end, like it always does, spectacularly—Nassim Nicholas Taleb
In this issue
The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy
I. Drowning in Debt: Philippine Government Bails Out the Energy Industry!
II. What the RPT Relief Confirms; The Four Phase Bailout Template
III. Phase 1 — Transactional relief: Chromite–San Miguel deal
IV. Phase 2 — RPT Cut: The Regulatory Relief
V. Phase 3 — Financial System Backstopping
VI. Phase 3a — The Policy Trap or the Escalating Systemic Risk Phase
VII. Phase 4 — Political Resolution: Socialization
VIII. Phase 4a – Socialization vs. Forced Liberalization
IX. Why This is s Late-Cycle Phenomenon
X. Conclusion: This Episode Was Never About Electricity Prices
The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy
The four phases of the SMC–AEV–Meralco rescue reinforce the logic of late‑cycle fragility
I. Drowning in Debt: Philippine Government Bails Out the Energy Industry!
In the third week of November, we noted:
The triad of San Miguel, Aboitiz, and Meralco illustrates deepening centralization, pillared on a political–economic feedback loop.
Major industry transactions, carried out with either administration blessing or tacit nudging, function as implicit bailouts channeled through oligarchic control. (bold original)
That thesis was quietly confirmed weeks later.
Buried beneath the torrent of daily headlines was a development of first-order importance.
Figure 1
GMANews, December 3, 2025: President Ferdinand Marcos Jr. has ordered the reduction and pardon of all interest and penalties on real property taxes (RPTs) levied on independent power producers (IPPs) for 2025. In a statement, Malacañang said the cut in RPT liabilities of IPPs is "to prevent defaults and economic losses that could affect electricity supply and the government’s fiscal stability." (bold added) (Figure 1, upper news clip)
Bullseye!
This was not a routine tax adjustment. It was an explicit admission that private-sector leverage—specifically within the power industry—had crossed into systemic risk territory.
It bears noting that the five largest power firms by market position are San Miguel, Aboitiz Power, First Gen, PSALM, and ACEN (Mordor Intelligence, 2024).
The sector is tightly concentrated, politically franchised, and structurally shielded from competition.
Aggregate 9M debt for the proponents of the Batangas LNG–Ilijan–EERI triangle—the SMC–AEV–MER troika—soared 16.4% YoY, reaching a record Php 2.254 trillion. Financing charges likewise jumped 8.3% YoY, hitting Php 101.17 billion, an all-time high. (Figure 1, lower chart)
In that same November post, we asked what this meant for 2025–2026. The answer was already embedded in the corporate balance sheets:
- cash liquidity is tightening
- banks are approaching risk limits
- debt has become the default funding model
- headline GDP growth is increasingly sustained by inter-corporate transactions rather than productive capex
- large conglomerates are supporting one another through balance-sheet swaps
According to the Inquirer.net, this marks the third time (2023, February 2025 and December 2025) the incumbent administration has forgiven or reduced RPT-related financial charges. That pattern matters.
Because this bailout arc pushes leverage toward the public balance sheet, the Philippine peso becomes the pressure valve of last resort
II. What the RPT Relief Confirms; The Four Phase Bailout Template
This latest RPT condonation has four critical implications:
1. Political brokerage: Confirms the deal was arranged and brokered politically—a backstop to buy time, not reform.
2. Elite rescue: The energy sector operates through de facto monopolistic political franchises; relief accrues to incumbents, not consumers.
3. Late-cycle marker: Preemptive default prevention reflects an economy drifting into business-cycle exhaustion, where failures are no longer politically tolerable.
4. Counterparty contagion: Because creditors to IPPs are also elite-controlled, counterparties will need support—expanding the bailout perimeter.
III. Phase 1 — Transactional relief: Chromite–San Miguel deal
The opening move comes disguised as a "strategic partnership."
In reality, AEV/Meralco—through Chromite Gas Holdings—absorbed San Miguel’s stressed LNG and Ilijan assets (SPPC, EERI, related industrial estate and terminal exposure). Balance-sheet pressure is eased without declaring stress; earnings volatility was suppressed, and leverage was redistributed rather than reduced—in the interim.
This phase is intentionally ambiguous. No one calls it a rescue. There is no emergency language, no fiscal line item. The objective is clear: prevent immediate balance-sheet failure without triggering market discipline, buying time before the state is forced to intervene.
It sets a crucial precedent—private leverage can be quietly transferred and restructured under the guise of efficiency.
This is a classic late-cycle hallmark: defaults become politically unacceptable, but overt bailouts are still premature.
IV. Phase 2 — RPT Cut: The Regulatory Relief
The next phase shifts from private camouflage to public condonation. The RPT cut is decisive.
Malacañang’s own justification—"to prevent defaults and economic losses that could affect electricity supply and fiscal stability"—reframes private leverage as a public-interest problem. That line is the SMOKING GUN!
At this stage, the bailout is no longer implicit; it is simply reframed as stability policy.
Fixed costs are reduced, cash flows are protected, local governments (including Special Education Fund allocations) lose revenue, and political risk is shifted from firms to the sovereign.
Concentrated gains, distributed costs—the political rent-seeking model, public choice theory in action.
Bluntly, profits remain privatized while costs are socialized—a political free lunch and textbook oligarchic capture.
This phase entrenches moral hazard: elites learn leverage will be accommodated, not disciplined. Smaller players and consumers are sidelined; political-economic imbalances mount, fragility escalates.
Crucially, previous rounds of subsidies have failed to repair balance sheets or deliver durable consumer relief. The evidence is clear: these measures stabilize optics, not fundamentals.
These two phases are ex-post. We now turn to the potential ex-ante stages.
V. Phase 3 — Financial System Backstopping
This phase is partly in process and could intensify.
Why issue such a justification unless there is a clear and present danger?
The fact that this is the SECOND time in 2025 that authorities have subsidized IPPs through RPTs speaks volumes about the underlying problems
Despite the BSP’s aggressive easing cycle—rate cuts, reserve‑requirement reductions, doubled deposit insurance, and record public spending that has pushed deficits back toward pandemic levels—liquidity stress persists. This signals a supply-side balance-sheet problem, not a demand shortfall.
The stress point is becoming unmistakable: elite-owned leverage, particularly in capital-intensive sectors like power—amid slowing growth.
Figure 2
According to the BSP’s Depository Corporations Survey, as of October the private sector’s share of domestic claims rose to 64.7%, while the combined financial and private sector share of M3 climbed to 80.63%. In Q3, domestic claims reached 77.6% of GDP, nearly matching the pandemic highs of 77.7% in Q1 and Q4 2021. By contrast, M2 and M3 shares of GDP—though still elevated since the pandemic recession—have been slowing, a clear departure from their previous synchronous trajectory during 2006–2020. (Figure 2)
This divergence underscores the core problem: systemic leverage has risen through domestic claims, concentrated among elite firms, yet its transmission to real economic activity has weakened.
This is the reason for the rescue mission.
VI. Phase 3a — The Policy Trap or the Escalating Systemic Risk Phase
As unproductive leverage persists and economic growth slows, bank balance sheets deteriorate. Liquidity tightens, lending slows, and stress migrates from corporates to the financial system.
The BSP will likely respond with escalating use of its pandemic playbook:
- Deepening easing: policy-rate and RRR cuts
- Implicit injections through BSP facilities.
- Explicit support: direct infusions (e.g., the Php 2.3 trillion precedent).
- Regulatory forbearance: capital relief and provisioning leniency.
- Soft-peg defense: attempts to stabilize USD/PHP.
Yet contradictions mount.
Figure 3
Monetary easing is constrained by inflation and FX risk; tightening risks amplifying bank stress. Domestic liquidity and external liabilities have been key drivers of the USDPHP’s rise. (Figure 3)
As domestic claims rise without generating real-sector activity, liquidity hoarding intensifies, weakening the monetary transmission mechanism and amplifying FX vulnerability.
The USD/PHP soft-peg becomes fragile—defense drains reserves, while abandonment risks inflation and capital flight.
Policy enters a trap: support the system and weaken the currency, or guard the currency and fracture the system.
Diminishing returns begin to cannibalize monetary and economic stability.
VII. Phase 4 — Political Resolution: Socialization
When liquidity support and regulatory masking can no longer hold, losses are formally absorbed by the state:
- Nationalization: partial or full state control of critical assets.
- Recapitalization: government injections into systemically important institutions.
- Bad-bank vehicle: a ‘Freddie Mac’–style structure to warehouse distressed assets while preserving legacy ownership.
Losses are socialized; control is recentralized.
The public balance sheet expands sharply while elite actors exit with preserved equity, retained assets, or negotiated upside. What began as a "strategic deal" ends as systemic capture, with nationalization the final stop in a late-cycle rescue arc.
VIII. Phase 4a – Socialization vs. Forced Liberalization
Late-cycle bailout arcs bifurcate.
If the state retains fiscal and monetary capacity, losses are socialized through nationalization or resolution vehicles. If capacity is lost—via reserve depletion, inflation, or debt saturation—the system drifts toward forced liberalization. Market discipline is not restored deliberately; it re-emerges violently.
In this scenario, incumbent protections collapse, policy support evaporates, and asset values are repriced downward. It may resemble "liberalization," but it is not reform—it is involuntary liquidation triggered by exhausted savings and unsustainable balance sheets or by unsustainable economics—resulting in disorderly transitions, and heightened political instability.
Ideology shapes the preferred response.
The populist embrace of social democracy, with its preference for top-down conflict resolution, skews the political response toward socialization.
But ideology is not sovereign and cannot override economics: real savings and fiscal capacity, not preference, ultimately determines which path the cycle takes. When the state can no longer absorb fragility, liberalization is not chosen—it is imposed.
IX. Why This is s Late-Cycle Phenomenon
These phases occur when:
- Leverage is high.
- Political tolerance for defaults has collapsed.
- Asset extraction has run its course.
- The state becomes the residual risk holder.
In early or mid-cycle, failure disciplines excess.
In late cycles, failure is deferred, masked, and ultimately absorbed by the public—after market discipline has already broken down.
X. Conclusion: This Episode Was Never About Electricity Prices
This episode was never about electricity prices.
The Philippine energy-sector rescue is not a single policy choice but a phased continuum: transactional camouflage, regulatory condonation, financial backstopping, and ultimately either socialization or forced liberalization. Each phase follows the same late-cycle logic—fragility is too politically costly to reveal, so it is deferred, disguised, and transferred away from the firms that created it.
What began as a "strategic partnership" now stands exposed as a systemic bailout, with the state increasingly positioned as the residual risk holder.
This is the defining feature of a late-cycle economy: leverage is high, defaults are politically intolerable, and oligarchic control ensure that private losses migrate toward the public balance sheet. Consumers and taxpayers ultimately bear the burden.
The real question is not whether the cycle ends in public absorption of losses, but how much fragility will be socialized before a reckoning becomes unavoidable.
Crucially, not all late-stage bailouts climax in outright socialization. When fiscal capacity collapses—through reserve depletion, inflation pressure, or debt saturation—the path can shift toward forced liberalization or selective deregulation and privatization.
This is not genuine reform but an involuntary unwind: protection collapses, policy support recedes, and assets are repriced downward. It looks liberal but functions as disorderly liquidation, with distributional costs shifted onto households while elites regroup.
Ideology shapes the state’s instincts. Populist social democracy, market‑averse and reliant on top‑down resolution, leans toward socialization. Liberalization, by contrast, rests on cooperation, division of labor, property rights, and rule of law — mechanisms that can resolve conflict without central command.
Yet ideology alone does not decide the path: fiscal capacity and real savings ultimately determine whether fragility is absorbed by the state or forced back into the market.
Thus, the endgame bifurcates:
1. Resolution by Socialization – nationalization, recapitalization, or bad-asset vehicles that warehouse losses while preserving incumbent control.
2. Resolution by Forced Liberalization – selective deregulation, privatization, and asset sales driven not by ideology but by incapacity, where the state abandons protection because it can no longer sustain it.
Both paths are late-cycle responses to the same underlying condition: systemic fragility accumulated over years of leverage, political accommodation, and institutional rent-seeking capture.
They differ not in purpose, but in the mechanism through which risk is transferred—and in both cases, the public ultimately shoulders the cost.
In late cycles, the currency becomes the final referendum on the system’s accumulated fragility
Caveat emptor.
____
References
Prudent Investor Newsletters, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23, 2025
Prudent Investor Newsletters, PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth, Substack, November 30, 2025
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