(conctac:massimo coltrinari: geografia2013@libero.it)
The temporary agreement to avoid a debt default in the US
will produce severe
consequences, not only in America but also in the rest of
the world, notably in
the eurozone.
As long as Barack Obama’s administration and US Congress
remain in the
hands of different parties, they will muddle through, trying
to gain time by
postponing the fundamental decisions. The deadline for
raising the debt
ceiling will be pushed forward, but there is no certainty
that the worst scenario
can be definitely avoided. In fact, the two main actors have
an incentive each
time to move ever closer to the precipice and try to obtain
some advantage by
threatening a default.
This is similar to the game of chicken European policy
makers played during
the eurozone debt crisis, bringing the single currency very
close to collapse.
Only at the last minute, when the risk of implosion became
apparent, did
European politicians ultimately decide to create a European
Stability
Mechanism and to move towards a banking union. The
intervention by the
European Central Bank, pledging to do whatever it takes to
avoid a collapse of
the monetary union, calmed the markets but catastrophic risk
has not
disappeared. It is reflected in the risk premium of some
eurozone sovereign
bonds.
If the US political authorities continue to follow the same
pattern, market
participants will have to start pricing in a non-zero
probability of a disaster
scenario. The memory of Lehman Brothers has not faded away,
after all. Tail
risk is likely to increase in the near future.
A repricing of risk for Treasuries can be expected to affect
a whole range of
asset prices, including in other countries. At the global
level, international
October 23, 2013
Share Clip this Print Email 0 Tweet 7 2
America’s debt crisis may drag the eurozone down | The
A-List
http://blogs.ft.com/the-a-list/2013/10/23/americas-debt-crisis-may-drag...
1 di 3 23/10/2013 18.00investors will be induced to further
diversify their portfolios, reducing the
overweight of dollar-denominated assets in favour of real
assets or financial
assets denominated in liquid currencies such as the euro.
The incentive to rebalance investors’ portfolios may also be
influenced by the
US Federal Reserve’s reaction to the recent deal. Interest
rates may remain low
for longer and capital may be induced to flow outside the
US, chasing higher
returns.
Overall, the increased tail risk on US government bonds and
the likely reaction
of US monetary policy should increase demand for non-US
assets. The best
rated European sovereigns should benefit from such a
portfolio shift. It is less
clear, however, that the eurozone as a whole will benefit.
Indeed, the supply of euro-denominated assets is not increasing
at the same
pace as the global demand. As a result, the euro exchange
rate can be expected
to further appreciate, continuing the trend of the past few
weeks. In fact, the
European currency is rapidly heading towards the levels
prevailing before the
start of the euro crisis. The rising current account surplus
of the eurozone,
resulting from asymmetric internal adjustment, is further
contributing to this
trend. This restricts monetary conditions in the eurozone.
On balance, the recent US budgetary events will produce
direct and indirect
restrictive spillover effects in the eurozone, symmetrical
with those the
eurozone crisis produced in the US at the peak of the crisis
between mid-2011
and 2012. However, eurozone authorities seem less well
equipped to deal with
these spillovers than the US authorities.
While at the peak of the euro crisis the US authorities flew
frequently over the
Atlantic to convince European policy makers to get their act
together and take
the steps needed to complete the institutional framework
underpinning the
single currency, it is more difficult to imagine Herman Van
Rompuy, European
Council president, meeting back and forth with John Boehner,
speaker of the
US House of Representatives, and Mr Obama to convince them
they need to
reach an agreement on the next debt limit in the interests
of the world
economy.
Furthermore, while the Fed embarked on various waves of
quantitative easing
to inundate financial markets with liquidity, avoiding an
over-appreciation of
the dollar, the ECB’s options are more limited. Cutting
further the policy
interest rate may help divert some of the demand for
euro-denominated assets.
The acknowledged weakness of the eurozone recovery and the
low inflation
rate – increasingly distant from the 2 per cent ceiling –
provide the necessary
justification for such a cut. It would hardly be sufficient,
however, to
discourage international investors’ demand for
euro-denominated assets.
If the strengthening of the euro is a result of increased
demand for euro assets
America’s debt crisis may drag the eurozone down | The
A-List
http://blogs.ft.com/the-a-list/2013/10/23/americas-debt-crisis-may-drag...
2 di 3 23/10/2013 18.00by international investors, the only
way to counter it – in the absence of capital
controls – is to increase the supply of euro assets or to
discourage demand.
The only institution in a position to do so is the ECB. It
could increase overall
euro liquidity by operating directly in the markets, which
would not be
inflationary as long as the liquidity is held by foreign
investors for
diversification reasons. Alternatively, it could discourage
demand for euro
liquidity by imposing a negative interest rate on euro
deposits held by the
central bank.
Either measure would be a significant innovation for the
eurozone. However,
they may in the end be unavoidable to counteract the
unintended
consequences of the way the US is managing its debt
problems.
The writer is a former member of the executive board of the
European
Central Bank and currently visiting scholar at Harvard’s
Weatherhead
Center for International
Affairs and at the Istituto Affari Internazionali in
Rome