Double-A trouble

What does the debt-limit controversy in the United States mean for Central Asia?

The bonds of the United States government were long regarded as solid as the Rock of Gibraltar; but in squalls, the Rock erodes. After August 2, the government may not be able to pay all its bills because laws prevent it from borrowing more –- a possibility that may lead the ratings agencies to downgrade Uncle Sam’s bonds from their traditional AAA. Financial investors may respond to this risk by demanding slightly higher yields before purchasing the bonds.

So what? Well, according to The New York Times, “analysts warn” that “in the broader economy, if money that might have gone to new purchases or increased investment were instead diverted to higher interest payments, the result could be slower economic growth and a higher jobless rate for the remainder of the year.”

No wonder that the “analysts” are anonymous. In reality, the economy need not shrivel just because money changes hands. The recipient of the interest may spend it or lend it, just as the payer of the interest might have done.

The complexion of the economy may change, yes. If the recipient of interest saves a greater share of his income than does the payer of interest, then the economy might eventually produce fewer consumption goods than before –- and more capital goods (such as machines and factories) that are financed by savings borrowed from the bank. The new factories will increase the economy’s capacity for producing. Eventually, the rate of economic growth may rise for a while, creating jobs. Of course, if the recipient of interest spends more of his income than does the payer, then consumption’s share of the economy will increase, at the expense of eventual economic growth. But the conventional assumption is that the buyer of government bonds is rich and thus will save a larger share of his income than is usual.

The certainty of uncertainty

The more pertinent question is: How will people interpret a downgrading of US government bonds to AA? The novelty of this event may create uncertainty, inducing people to hoard money as a precaution. Spending on consumer and capital goods will fall. The economy will slow, destroying jobs.

Some consequences of failing to raise the government’s debt limit are more direct. First, the government may spend less, which would reduce national income. Second, higher interest rates on government bonds may also raise rates on related assets -– private bonds, bank loans -– that are also perceived to be in hotter water than before. The increase in interest rates will discourage firms from borrowing to finance expansions of their capacity to produce.

For Central Asia, the real danger is that another slowdown in the U.S. may coincide with one in Europe, where the probable default of Greece -– and the likely bailout of Cyprus -– may create more uncertainty and hoarding. There is a small but growing chance that the world economy may face another 2008. “The market is far more intelligent and resilient than a lot of politicians realize,” Lee C. Buchheit, a lawyer experienced in national defaults, told The New York Times. “Investors realize that sometimes you make money and sometimes you don’t. But they can’t abide prolonged uncertainty.”

The fallout from global recession would rain on Central Asia, where the national economies depend on exports. In Kazakhstan, exports have accounted for more than half of the economy (or close to half) since 2000 -- except in 2009, when falling oil prices helped cut the export share of gross domestic product to 45.9%, according to World Bank data.

Similar trends hold for the region. For 2000 through 2009, the average export share was 73.2% in Turkmenistan, 50.4% in Kazakhstan, 45.4% in Tajikistan, 42.9% in Kyrgyzstan, 35.6% in Uzbekistan, and (for comparison) 34.4% in Russia, according to World Bank data. All of these shares are well above the world average of 26%: Central Asia is unusually vulnerable to global downturns. Since 2000, the export shares have generally been rising throughout the region except in Uzbekistan and Russia, which recorded slight declines. Hold on to your hat; August 2 is coming. -- Leon Taylor, tayloralmaty@yahoo.com


Good reading

Michael Cooper and Louise Story. Q. and A. on the debt ceiling. The New York Times. July 27, 2011


References

Julie Creswell and Louise Story. On all levels of the economy, concern about the impasse. The New York Times. July 26, 2011. www.nyt.com

Steven Erlanger and Rachel Donadio. Beyond Greece, Europe fears financial contagion in Italy and Spain. The New York Times. July 19, 2011. www.nyt.com Quotes Buchheit.

Paul Krugman. The lesser depression. The New York Times. July 21, 2011. www.nyt.com Argues that simultaneous slowdowns in the U.S. and Europe could endanger the world economy.

Oakley, David. Fitch warns Greece of “selective default.” The Financial Times. July 22, 2011.

Peter Spiegel. Moody’s downgrades Cyprus bonds. The Financial Times. July 27, 2011. www.ft.com

World Bank. World Development Indicators. Various years. www.worldbank.org