US default unlikely, but Thailand must prepare for worst: WBank

WHAT IS YOUR ASSESSMENT OF THE OCTOBER 17 DEBT-CEILING DEADLINE?

Our expectation is that there will be a deal reached. It might be taken to the last minute. The last time this happened, in 2011, eventually right before the debt ceiling [deadline] was going to be reached, a deal was reached. And our expectation is that the same thing will happen [this time]. 

 

WHY DO YOU THINK THERE WILL BE AN AGREEMENT?

Because the consequences are quite high. The immediate effects of the government shutdown that is happening now are serious for some people. Federal government workers in the US are laid off and are not working. So for them it is very serious. But for the broader economy, it has not been that serious. In 1995 and 1996 during [Bill] Clinton’s presidency, there was a similar event and the consequences both for the US and the global economy were not that serious. In that case and in 2011 they reached a deal before the debt ceiling was breached. Now if they don’t manage to reach a deal, then the consequences are likely to be much more serious

 

BUT OBVIOUSLY, WHILE THERE SEEMS TO BE OPTIMISM, THERE IS STILL DISAGREEMENT IN THE US GOVERNMENT. HOW DO YOU SUPPOSE IT IS GOING TO END?

Well, one side or the other – or both sides – will have to make concessions. There are some proposals on the table. One of them is a temporary raising of the debt ceiling for about two or three weeks, which would give a little bit more space and time to reach a deal. But both sides have to come together, and at this point right now they have not yet done that. 

 

BUT IS THIS JUST A POSTPONEMENT OF THE PROBLEM ITSELF OR IS IT GOING TO ACTUALLY BE SOLVED?

Well, first I would like to say that I am hopeful. I am not sure if I would describe it as very confident but I hope that they will reach a deal. In terms of whether this is a postponement of the problem, this is President [Barack] Obama’s point, that within countries there always have to be negotiations about budgets. You have to reach a consensus on what the budget should be. 

 

TALKING ABOUT THE WORST-CASE SCENARIO, A DEFAULT, WHAT IS THE POTENTIAL FOR THAT, AND WHAT WOULD HAPPEN TO EMERGING AND OTHER MARKETS?

This has never happened before. The reason that US Treasuries are the safest assets in the world is that the US government has never defaulted, and there has always been an understanding that they will be able to meet their obligations. This makes it difficult to forecast what the impact would be. But one place to start could be to look at an event like 2008 when Lehman Brothers collapsed. When Lehman Brothers collapsed there was a crisis of confidence in the markets and banks, for example, became nervous about lending to one another because they were not confident in each other. And that is the kind of effect that would happen today.

 

IT IS REALLY ABOUT CONFIDENCE IN THE US DOLLAR, ISN’T IT? IS THIS SOMETHING THAT WE ARE GOING TO SEE STILL SUPPORTING THE US OR IS THIS A SIGN THAT THERE IS GOING TO BE CHANGE?

What is very interesting was [that] both in 2008 but also in 2011, when you had the prospect of default, when it seemed like the US government was not going to be safe, money still flowed back to the US. So somehow investors had this view that even with all the problems, the US [dollar] was still the safest currency in the world. My guess is that if there was an actual default, which hasn’t happened yet, then that will start to change. There is already a long-term process by which the US is not going to be the sole international currency. Once Europe recovers, the euro is likely to be increasingly an international currency. The RMB [Chinese renminbi] is likely to be an international currency. A default in the US will strengthen that process. 

 

LET’S TALK ABOUT THAILAND. WHAT IS YOUR ASSESSMENT FOR THE THAI ECONOMY AND WHAT SHOULD THE THAI GOVERNMENT DO IN CASE OF A US DEFAULT? 

Thailand relative to many countries and relative to what happened in 2008, I think, is starting from a slightly better position. The reason for that is that there have already been some ups and downs. Most recently after the Fed announcement of tapering, Thailand has already experienced quick capital outflows, and I think that will be the first and most immediate impact. What the Thai government will have to do is to see what policies, both on the monetary and fiscal sides, they can take to help mitigate some of those measures. Now on the fiscal side, because of the policies that have already been undertaken, there is less space than there was earlier, but even within those constraints, given the magnitude of what is likely to happen, I think the government will have to prepare to respond on the fiscal side. On the monetary-policy side, I think one of the things that are going to happen that will help rebalance the economy is that the exchange rate will continue to depreciate. The other thing that I think the central bank will have to watch out for is rising interest rates, because consumer debt has been growing so fast. If interest rates continue to rise, then one of the things to monitor is whether that is going to have an impact on non-performing loans and then on the health of the banks more generally.