US default

Asian governments, and the global financial markets for that matter, are monitoring the budget impasse in the US Congress that could stall recovery in the world’s biggest economy.

Two international rating agencies—Standard & Poor’s and Moody’s Investors Service—have already warned Washington of a downgrade in the US credit rating if lawmakers failed to reach an agreement to raise the US borrowing limit of $14.3 trillion before the Aug. 2 deadline.

The heavily-indebted US still enjoys a triple-A bond rating from rating agencies—the highest grade—because of the creditors in it and Washington’s ability to honor its obligations. But with its current debt limit, the US will likely default on some of its obligations if it’s not able to borrow over the amount authorized by Congress.

A default will surely derail growth in the world’s largest economy and make it riskier for foreign funds to invest in the US. Asian exports will likely suffer because of a slower US economic growth and pressures for local currencies to rise.

The unprecedented default will predictably rattle global financial markets in a knee-jerk reaction as fund managers reduce their exposure to American investments.

The adverse development in the US, however, will provide some benefits to emerging markets like the Philippines. Global funds over time will find their way to Asia because of the more lucrative returns on their investments. This will lift Asia’s stock markets and boost the value of the regional currencies, including the peso, against the US dollar.

The massive inflows of foreign funds, in the meantime, will create inflationary pressures and prompt Asian central banks to raise interest rates further. Asian governments have responded to contain inflation and preserve economic growth before. But the negative development in the US and the shift in global funds in favor of Asia may in turn prompt the central banks in the region to adopt a more hawkish monetary policy. An ailing American economy, after all, is not an ideal scenario for growth.

Source:-
http://www.manilastandardtoday.com/sectionOpinion.htm?f=2011/july/19/editorial.isx&d=2011/july/19