It's All about That Worn-out Dollar

TV anchor Mia Santova, interviewee Nikolay Vassilev, former Bulgarian Minister of Economics with the government of NDSV.

MIA SANTOVA: With us today is Bulgarian former minister of Economics Nikolay Vassilev; we will talk about credit ratings and their significant impact on the way we see economy, politics, people and even media. Mr. Vassilev, last week Standard and Poor’s slightly downgraded the credit rating of the American currency. I just read one of the leading titles of the Bulgarian daily Monitor stating that the dollar has hit one of his lowest points for the last three years. What is going on?

NIKOLAY VASSILEV: Americans don’t have many reasons to be proud of their economy right now. In the last 50 or even 100 years, whenever we asked which country was the most stable institution in the world in terms of economic strength, the answer would be the American government. There were no doubts about that. There could be wars, there could be earthquakes, there could be nothing at all, but the answer would remain the same — the American government. The magnitude of what happened 10 days ago is historic. For the very first time, a credit rating agency dared to say that the picture is not that bright anymore. It did so by downgrading not even the credit rating of the U.S., but the perspective for its future.

MIA SANTOVA: Let me remind our viewers of what happened last week. The global markets were caught by surprise by Standard & Poor’s’ pessimistic forecast about the future of the American economy. Although the agency rates the overall U.S. credit with the usual AAA, it downgraded America’s credit outlook from stable to negative for the first time in history. The reason behind the pessimistic expectation is that the government did not present a clear strategy for the long-term fiscal problems of the country. A while ago, one of Chinese credit agencies downgraded the U.S.’ credit form AA to A+. The Chinese have doubts in the ability of the U.S. to repay their debt. Beijing is concerned about the American model of economic development and sees major flaws in it. The Chinese are anxious that it will lead to a long-term recession and it will hurt U.S. solvency. All this is going to devaluate the dollar. Could you please explain to our viewers how all this will affect the global markets and what is the role of credit rating agencies?

NIKOLAY VASSILEV: There are tons and tons of investors all over the world — all companies, all financial institutions, all citizens, me and you, we could invest at any time in all kind of stocks or securities. Millions of people around the world are not economists. They can not differentiate between the financial power of the German government and the financial power of a particular Japanese bank. That’s why there are established, reliable credit rating agencies who apply their professional prestige and enormous analytical capacity to tell us that this country or this security has this or that credit rating. They use objective methodology and because of that we can no longer pretend that the U.S. is made of pure gold. Chronic fiscal deficit is the core of the problem. Fifteen years ago, the U.S. was still a leader, an exemplary model. They had a very powerful economy, budget surplus, they used to spend less than what they earn and the stock market was strong. Overall, the United States had a very strong economy and their strength was way more than that. What has happened for the last 10 years, tough, would come as a big surprise to the people who taught me the basics of finances and economics. The U.S. having huge deficits and weak currency, for economists this is similar to Albania winning a soccer championship against Brazil.

MIA SANTOVA: Or Levski defeating Manchester United. Some people say that credit rating agencies often take sides when doing their job. Do you see this as speculation?

NIKOLAY VASSILEV: Well, credit agencies are often sponsored by financial institutions and government entities whose ratings they are entitled to assess. Promoting the interest of whoever pays your bills makes sense, doesn’t it? So these critics are partially fair. Overall, though, big credit rating agencies are reliable and give accurate information. Maybe sometimes they are running a bit late with downgrading. If you ask me, the signal given now about the U.S.’s future rating should have been given five years ago.

MIA SANTOVA: What is your explanation for the delay?

NIKOLAY VASSILEV: Mainly the fact that seeing the U.S as the most powerful financial institution has been a historic axiom for such a long time that it is just hard to accept the new reality. Sooner or later, though, we will have to. I looked at Japan’s ratings this morning — it is going in the same direction, double A, instead of triple.

MIA SANTOVA: Is the earthquake and the following series of disastrous events the reason for that?

NIKOLAY VASSILEV: Well, this month maybe the calamity was the major reason, but the last 10 or even 20 years Japan’s economy have been defined by record deficits and overwhelming public debt. Japanese debt is two times Japan’s GDP. We are talking about 210-220 percent! Just for comparison, Bulgaria’s debt is 15-16 percent. We are one of the least overspending countries in the world. Fifteen years ago, we would laugh at such a statement, but today it is true and it is one of our biggest advantages.

MIA SANTOVA: Great thing to know!

NIKOLAY VASSILEV: Yes, indeed. It is the result of the joint effort of four Bulgarian governments since 1997.

MIA SANTOVA: Finally, continuity is part of our politics, at least for one thing.

NIKOLAY VASSILEV: Well, right now this continuity is partial, because for the first time in 14 years we have small but chronic deficits. Looking at the big picture, though, Bulgaria is financially way more disciplined than most of the world, including Europe.

MIA SANTOVA: Does the cheap dollar have an influence on our economy and if so, in what terms?

NIKOLAY VASSILEV: It does. Whenever Bulgarians pay in Bulgarian lev for goods produced in countries where the dollar is the dominant currency, they pay less. This is not only the U.S., but also countries like Turkey and even Russia to a certain degree. Europe is not in that list at all, I’m talking about countries whose economies are oriented more toward the dollar that the euro. Their products are less expensive for us. If everything else remains the same, that would mean lower inflation for us. On the other hand, though, the price of gold, oil, etc. on the stock market goes up since it is traded in dollars, and that kind of balances everything out for our pocket.

MIA SANTOVA: How do you see China in the big picture? The Chinese hold the debt of the U.S. in their hands.

NIKOLAY VASSILEV: In the next 20 years we will talk more and more about China and less and less about other countries. In the last 30 years their muscles have grown tremendously. Chine’s safe deposit box is brimming with trade surplus, huge foreign capital and treasuries and gold. China is very strong and should be an example for Western countries. I don’t think that they are strong because they are a socialist country, but because they spend some 24 percent of their budget. The U.K., for instance, spends about 51 percent of its budget, which is a weird phenomenon since China is a socialist country and the U.K. is a capitalist one. It is logical to be the other way round. China’s currency is also going stronger and stronger every single day. If we could invest in the Yuan, we would, but that is not possible since the Yuan is a non-convertible currency.

MIA SANTOVA: Speaking of China and the U.S., it is interesting to mention Donald Trump, who is now running some sort of undeclared presidential pre-campaign. He hasn’t announced his presidential ambitions yet, but he appeals to a large fraction of the American public mainly because he threatens China’s economic rise in all possible means.

NIKOLAY VASSILEV: What he is talking about is called protectionism. It has a long history, but overall it is a type of economic policy explored mainly by weak countries. Those who fear foreign production impose certain rules in order to protect domestic products. It is a sign of poor quality. Produce better and cheaper products and everyone is going to buy it, including China.