Russian and foreign economists discuss the implications of the U.S. debt ceiling for the rest of the world as well as possible long-term consequences for the image of the U.S. abroad.
An electronic display with currency exchange rates on a Moscow street. Photo: RIA Novosti / Alexander Utkin
The U.S. debt ceiling is a topic of spirited debate not only among Republicans and Democrats but also among Russian pundits who came together at a recent Moscow roundtable discussion, “Economic crisis in the U.S.: External threats.” The event, which took place in the RIA Novosti business center, addressed the challenges of the U.S. debt ceiling and its consequences for the rest of the world.
Prominent Russian economists expressed their concerns and discussed probable scenarios of the U.S. financial crisis and how it might impact the U.S. image abroad.
“This time, the conflict is very serious: The risk of human error is growing in terms of the current financial instability,” said Professor Yakov Mirkin, Head of the Department of International Capital Markets at the Russian Academy of Sciences’ Institute of World Economy and International Relations.
Mirkin compares the current situation with the 2008 financial crisis and warns against the same grave effects of a meltdown that would destabilize the world’s economic system. He argues that the U.S. is the heart of global financial activity with about 30 percent of the world’s financial assets. For the Russian economy, the situation is especially “sensitive” because it depends so much on world oil prices. According to him, such a crisis may also bring about a huge drop in oil prices and destabilize the U.S. dollar, which will be “a big knock-down” for the world economy.
“We are dealing not with an economic crisis in the U.S., but with a financial crisis,” said Alexey I. Rey, Head of the Center for Industry Studies at the Institute for U.S. and Canadian Studies of the Russian Academy of Sciences. He points out that there is currently growing consumer demand in |the U.S. with no visible signs of serious economic decline.
“But it doesn’t mean that the [financial] crisis can’t affect the real sector of economy,” he clarifies. “The U.S. state treasury debt has been growing at an unprecedented pace. This is a cyclical process, but its implications and scale puzzle [economists and politicians].”
Rey believes that the U.S. faces the financial challenges first and foremost because of a political crisis: Republicans and Democrats dragged their feet about coming up with compromise on the budget and health-care reform (also known as Obamacare). All this creates a basis for technical default that is likely to hit the position of the U.S. in the world’s economic rankings and bring about a number of problems for global financial markets, he explains.
Yury Yudenkov, Professor at the Russian Presidential Academy of National Economy and Public Administration, echoes Rey’s opinion. He warns against the shutting down of some U.S. government programs unless Republicans and Democrats reach a compromise.
In addition, he argues that the inability of the U.S to tackle the problem of the debt ceiling will affect the U.S. dollar, an event that might force other countries to use their national currencies to save their gold reserves.
Irina Platonova, head of the International Economic Relations Department at Moscow State Institute for International Relations (MGIMO-University), further develops Yudenkov’s ideas about the threats to the U.S. dollar.
“China started the policy of squeezing the [U.S. dollar] in their operations in the international markets,” she argues. “That’s why China is actively strengthening its own currency – the Yuan – in international market operations. And other countries might see this move as a signal to act.”
Despite their concerns, some Russian experts are not inclined to come up with very pessimistic scenarios and instead, seem to appear optimistic.
“I don’t want to develop the idea of apocalypses,” Mirkin said. “We are just at a crossroads.”
When asked by Russia Direct about the implications of the financial instability on the world order and the U.S. image abroad, Mirkin said that the debt ceiling impasse would definitely hit Washington’s positions in world economic rankings and become a landmark, pivotal moment for modern geopolitics and the balance of power.
At the same time, Mirkin points out that the crisis might even more improve the U.S. economic and political record because the country learned lessons from the 2008 crisis and, as a result, became more flexible in responding to crisis situations.
“After all, the U.S. is still a powerful economy and its economic model is flexible enough,” he said, pointing out that reckless forecasts and estimates might be misleading.
U.S. debt ceiling: Much ado about nothing
Some foreign economists seem to be hesitant about predicting serious long-term consequences for the world and also appear optimistic.
“If the issue is not resolved by the deadline on Oct. 17 then the noise will certainly increase but this should still not be a big issue for the U.S. or the global economy,” said Chris Weafer, senior partner with Macro Advisory, a Moscow-based consultancy providing research services to macro hedge funds, venture capital investors and foreign companies looking at investment opportunities in Russia and Central Asia.
“Only if the budget standoff and the debt ceiling were to remain unresolved for a protracted period of time, i.e. months rather than days, would we start to worry about the contagion effect,” he explains. “Passing the Oct. 17 deadline will only trigger more headlines but not an economic or currency crisis. Not for a long time past the due date.”
Weafer sees the U.S. as the world’s biggest economy. Regardless of the high level of debt, the U.S. dollar is still the world’s most important trade and reserve currency. And the debt ceiling standoff is hardly likely to change this situation because there is no other alternative to the U.S., according to him.
“China is the world’s 2nd largest economy but it remains relatively domestically focused and the Renminbi is neither free floating nor a reserve currency,” he explains. “The Euro is hardly in a better position than the dollar to be the world’s major trading and reserve currency as the Euro zone region has its own serious issues still to resolve.”
Weafer views the threat of long-term debt default as a good reason to reassess and diversify global economic and currency policy in the long run.
“Longer term, the debt default threat, added to previous events such as the Lehman Brothers collapse, do add weight to the case that there needs to be greater diversity in the world economy and in the currencies used for trade,” he says. “Russia, for example, has previously made the case within the G20 that the reliance on one currency (the U.S. dollar) is dangerous and causes instability. Russia has argued for a currency basket approach.”
If the debt ceiling is not raised, "this would be a big blow to the standing of U.S. government debt in the global financial marketplace,” according to James R. Barth, the Lowder Eminent Scholar in Finance at Auburn University and a senior fellow at the Milken Institute.
“Already, some holders of substantial amounts of short-term U.S. government debt are taking actions if such an unprecedented event were to occur," he said. "However, I do not expect the U.S. government to default on its debt and some movement by the U.S. Congress and the President to prevent this from happening is already taking place.”
Without a compromise on the debt ceiling and the federal budget, the image of the U. S. will certainly suffer, Barth argues.
“I do believe members of the U.S. Congress and the President understand this fact and therefore a compromise is highly likely to emerge sometime soon,” Barth said. In this case, he believes, there should be no long-term damage to the United States.
“Unfortunately, the current situation has unnecessarily focused attention on how strong political differences can at times disrupt governmental services by shutting down a portion of the government,” Barth said.