Eva Burtshtein, Elena Kukol, RT.COM
United States’ refusal to pay its debts or a default of the world’s largest economy could lead to consequences that will make the recent crisis of 2008 seem like child’s play, say experts. Though, at the same time, they note that this very possibility is, at least for now, only hypothetical.
… its consequences could be compared to a nuclear disaster in the global financial sector that would spread to each and every country, says Yakov Mirkin, chairman of the Financial Markets and Credit Organizations Committee of the Russian Chamber of Commerce and Industry. The US accounts for more than a third of financial assets worldwide. Meanwhile, the “risk-free” US treasury bonds are the core of US finances and, in many ways, global finances as well, notes the expert.
Russia, too, will suffer losses. According to the US Federal Treasury, our country is the eighth largest holder of US national debt, says Mirkin. In April of 2011, this indicator equalled $125 billion, or about a quarter of Russia’s foreign reserves. A default will primarily result in a decline of confidence in the dollar. This means that the price of other currencies, including the ruble will rise, adds Sergey Pukhov, senior researcher at the Development Center of the Higher School of Economics. He predicts the dollar could lose 10-20% of its value. And for the Russian economy, which already suffers from a strengthening ruble and an influx of imports, this situation is disadvantageous. Moreover, problems in the US are liable to plunge the world into a second recession, says Pukhov.
The economy of all other states will start to shrink and finally go into stagnation, continues Pukhov. Demand will fall, including for Russia’s main export items. Oil prices could fall to $60 per barrel. Russia’s budget planning for next year is based on the price of oil being at $95 per barrel.
However, with the fall of the dollar commodity prices will, contrarily, begin to rise, says Aleksey Vedev, director of the Center for Structural Research at the Gaidar Institute of Economics. A default could cause a sharp rise in the price of gold as investors will be saving themselves by investing in any other assets, particularly gold, adds financial analyst Sergey Suverov. A default threatens the collapse of all stock markets, and losses in people’s real income. Not only will US citizens suffer losses, but so will the residents of other countries, including Russia, whose stock market is closely tied to the movement of world indices. Conditions for access to foreign resources will become more complicated, adds Vedev.
However, this grim scenario is unlikely to happen, argue almost all of the experts interviewed by Rossiyskaya Gazeta (RG). Default is unimaginable. There has not been a single precedent in the world, excluding military events, of a major economy refusing to pay its debt, says Sergey Moiseyev, deputy director of the Financial Stability Department at the Central Bank. Americans will not allow such a turn of events to happen even if it kills them. Disputes over what to do in order to prevent non-payment of even government securities have been ongoing between the Democrats and Republicans over recent weeks.
Nevertheless, it should be acknowledged that the first deputy head of the Central Bank, Aleksey Ulyukayev, did not exclude the possibility of a technical default. Perhaps some portion of the obligations will not be covered and some US debt holders will be forced to incur losses, he suggested. But this will not lead to any major consequences and will have an insignificant effect on the dollar exchange rate against the ruble, noted Ulyukayev, advising citizens not to panic or rush to get rid of their dollars.
However, some experts consider even a temporary suspension of payments on obligations to be quite dangerous. A technical default is, of course, not a collapse, but it is a crisis which indicates that payments may be delayed for several weeks or months, says Vedev. And that will result in shocks and negative expectations on the financial markets, warns RG’s interlocutor.
“There is a risk that a technical default could cause a chain reaction of systematic risk in the US and throughout the entire perimeter of developed markets,” says Mirkin. “The price of financial assets of banks and other financial institutions will drop, followed by insolvency of financial institutions on their obligations. Next, it will be the violation of payments and clients’ ‘raids’ on banks, which no one will be able to help as governments will have lost their liquidity.” He went on to outline the following possibilities: capital flight from developing markets, such as Russia, pressure on national currencies and devaluations, inflation outbreaks, “black holes” in banks’ balance sheets, and the violation of payments.
At the same time, experts argue that the US will not allow a technical default to take place. The qualification of the teams, which are currently trying to reach an agreement, excludes such a possibility, says Mirkin. A technical default does not interest the Republicans or the Democrats as it contradicts their goals, explains Yevgeny Nadorshin, senior economist at AFK Sistema.
The way other countries will react to such a turn of events is very important, says Pukhov. Much will depend on China, as the yuan is pegged to the dollar. Not a single country in the world is interested in having a sharp rise in the price of its currency. In the worst case, there could be another currency war, says Pukhov. Interventions will soften the fall of the dollar, though the trend will continue. “Regardless of how actively the situation with a technical default is being discussed, the ruble will still continue to strengthen against the dollar,” predicts Nadorshin.
Nevertheless, the ignited passions have become another wake-up call for the world. A default is currently impossible, but there is no guarantee that it will not happen in the future. Market participants have long not considered this to have a zero probability, says Nadorshin. If the problem of America’s high level of national debt is not resolved, then in 10-15 years technical default and default will be a relevant question, says Pukhov. The question now is how well Russia, and the world in general, will be able to prepare for this.