U.S. Default Would Bankrupt Russia
Barack Obama demanded that the leaders of the United States Congress reach an agreement about raising the government debt ceiling by Saturday morning. If the congressmen do not heed the president and stall solving the problem, then the United States will technically default. In that case, Russia can expect to see an economic disaster even more dire than that of 2008.
“For Russia, as a developing country, this means a massive flight of capital and a decrease in investment in fixed capital. Before, if crises and defaults occurred somewhere, all the investors simply turned to United States for securities loans. In the case of an American default, one of the few recourses would be the withdrawal of monies into a cash turnover, which would lead to a significant acceleration in inflation since the currency mass would grow and the national currency would, in turn, devaluate,” explains Investcafe analyst Anton Safonov. In his opinion, this will lead to even more troubling consequences than the 2008 fiscal crisis. The longer term unraveling of the situation will depend on how long it takes the world economy to bounce back and how fast world trade can switch to another currency.
“For many decades, American promissory notes have been considered the de facto 'gold standard' of reliability,” addes the head of the investment division of IFK, “Solid” Mikhail Koroliuk. “Many large institutional investors (pension funds, insurance companies, etc.) have a right to commit a fraction of their assets amounting to billions of dollars only to instruments of the highest security. This is clearly prescribed in their documents. A U.S. default and a decrease in the rating of U.S. debt notes would lead to these investments, worth billions of dollars, being made elsewhere. The effect of such a re-channeling of capital for the world’s finanicial markets can be compared to the dance of an elephant on a kayak.”
“This will be worse than 1998,” says the assets manager of Broker Credit Service, Nikolai Solabuto. “Prices will just fall. There will be mass firings and a drop in salaries. A $400 wage will be considered very solid.” According to the expert, the stock exchange will act as a litmus test, being the first to fall. Shortly thereafter, bank rates will climb higher, and 200 percent per year will be the norm for deposits. Finally, real estate prices will decrease, meaning $700 per square meter for Moscow real estate will be the bargain. “In order to support the people, the government will create jobs by rejecting construction technologies and employing more workers. Imagine the construction of a high-rise building that has people with bricks running about it like ants.”
As of today, the government debt ceiling stands at $14.3 trillion and cannot be raised legally. By August 2, Congress must approve the budget plan for the 2012 fiscal year, and the projected revenue (without growth of the debt level) does not cover all of Washington’s plans. If it is not approved, the country will declare a technical default, an inability to pay off its debts. The Democrats demand to raise the the borrowing limit by $2.4 trillion, while the Republicans adamantly want to present a 10-year plan to decrease government spending by $2 trillion.
On Wednesday, Chairman of the Federal Reserve Ben Bernanke warned that if an agreement was not reached by August 2, the country could experience a serious recession. The government would be forced to cut its budget, including for pensioners. The rating agency Moody’s Investors Service has stated that if legislators fail to raise the debt ceiling, the United States could lose its high credit rating. On Thursday, Obama gave the participating lawmakers until Saturday morning to engage in negotiations, by which time the Democrats and Republicans will unconditionally need to have come to an agreement.
Few people are ready to believe that the two sides will actually fail to broker a deal. Only for this reason has there not been an enormous collapse in the stock exchange. “Despite the encroaching deadline, the market has not experienced any panic. Everyone understands that these are just political theatrics intended to win additional points with voters prior to the 2012 presidential and congressional elections,” explains Denis Barabanov, the chief of the analysis division of IK “Grandis Capital.”
If the total government debt is increased and the U.S. avoids a default, then Russia can largely remain calm. “Nothing will change, and everything will remain in its place in the world economy and global trade,” thinks Safanov, adding that “the question of the debt ceiling has come up in the past, and it has always been successfully solved.”
Koroliuk is more careful in his prognosis. “Everything hinges on details. In general, we are dealing with a significant slash in United States government spending, a kind of tightening of the belt. This could easily lead to the next episode of recession in the U.S., which would then result in a fall in oil and metal prices, which can only spell negative consequences for Russia.”
The plot of popular children’s film “Malchishe-Kibalchishe” presents the situation in a completely opposite light. The Burzhuin chief gave orders to ask a prisoner, “Isn’t there a secret route from your country to all others, which would allow you to call and us to answer, you to sing and us to join along, you to say something and us to think about it?” In the present situation, there is apparently no such tunnel. Only it is not the Burzhuins who are calling back at our whim, but us who are answering to those abroad.
“For Russia, as a developing country, this means a massive flight of capital and a decrease in investment in fixed capital. Before, if crises and defaults occurred somewhere, all the investors simply turned to United States for securities loans. In the case of an American default, one of the few recourses would be the withdrawal of monies into a cash turnover, which would lead to a significant acceleration in inflation since the currency mass would grow and the national currency would, in turn, devaluate,” explains Investcafe analyst Anton Safonov. In his opinion, this will lead to even more troubling consequences than the 2008 fiscal crisis. The longer term unraveling of the situation will depend on how long it takes the world economy to bounce back and how fast world trade can switch to another currency.
“For many decades, American promissory notes have been considered the de facto 'gold standard' of reliability,” addes the head of the investment division of IFK, “Solid” Mikhail Koroliuk. “Many large institutional investors (pension funds, insurance companies, etc.) have a right to commit a fraction of their assets amounting to billions of dollars only to instruments of the highest security. This is clearly prescribed in their documents. A U.S. default and a decrease in the rating of U.S. debt notes would lead to these investments, worth billions of dollars, being made elsewhere. The effect of such a re-channeling of capital for the world’s finanicial markets can be compared to the dance of an elephant on a kayak.”
“This will be worse than 1998,” says the assets manager of Broker Credit Service, Nikolai Solabuto. “Prices will just fall. There will be mass firings and a drop in salaries. A $400 wage will be considered very solid.” According to the expert, the stock exchange will act as a litmus test, being the first to fall. Shortly thereafter, bank rates will climb higher, and 200 percent per year will be the norm for deposits. Finally, real estate prices will decrease, meaning $700 per square meter for Moscow real estate will be the bargain. “In order to support the people, the government will create jobs by rejecting construction technologies and employing more workers. Imagine the construction of a high-rise building that has people with bricks running about it like ants.”
As of today, the government debt ceiling stands at $14.3 trillion and cannot be raised legally. By August 2, Congress must approve the budget plan for the 2012 fiscal year, and the projected revenue (without growth of the debt level) does not cover all of Washington’s plans. If it is not approved, the country will declare a technical default, an inability to pay off its debts. The Democrats demand to raise the the borrowing limit by $2.4 trillion, while the Republicans adamantly want to present a 10-year plan to decrease government spending by $2 trillion.
On Wednesday, Chairman of the Federal Reserve Ben Bernanke warned that if an agreement was not reached by August 2, the country could experience a serious recession. The government would be forced to cut its budget, including for pensioners. The rating agency Moody’s Investors Service has stated that if legislators fail to raise the debt ceiling, the United States could lose its high credit rating. On Thursday, Obama gave the participating lawmakers until Saturday morning to engage in negotiations, by which time the Democrats and Republicans will unconditionally need to have come to an agreement.
Few people are ready to believe that the two sides will actually fail to broker a deal. Only for this reason has there not been an enormous collapse in the stock exchange. “Despite the encroaching deadline, the market has not experienced any panic. Everyone understands that these are just political theatrics intended to win additional points with voters prior to the 2012 presidential and congressional elections,” explains Denis Barabanov, the chief of the analysis division of IK “Grandis Capital.”
If the total government debt is increased and the U.S. avoids a default, then Russia can largely remain calm. “Nothing will change, and everything will remain in its place in the world economy and global trade,” thinks Safanov, adding that “the question of the debt ceiling has come up in the past, and it has always been successfully solved.”
Koroliuk is more careful in his prognosis. “Everything hinges on details. In general, we are dealing with a significant slash in United States government spending, a kind of tightening of the belt. This could easily lead to the next episode of recession in the U.S., which would then result in a fall in oil and metal prices, which can only spell negative consequences for Russia.”
The plot of popular children’s film “Malchishe-Kibalchishe” presents the situation in a completely opposite light. The Burzhuin chief gave orders to ask a prisoner, “Isn’t there a secret route from your country to all others, which would allow you to call and us to answer, you to sing and us to join along, you to say something and us to think about it?” In the present situation, there is apparently no such tunnel. Only it is not the Burzhuins who are calling back at our whim, but us who are answering to those abroad.
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