28 July 2011
JEDDAH - Though it is widely believed that the US would not default on its debt, still the consequences of not reaching an agreement by Aug. 2 on the world's biggest economy's debt limit is deemed momentous by some analysts.
In effect, it would deprive the US government of its authority to borrow for the first time, whose impact would also have telling repercussions for the Gulf region.
John Sfakiankis, chief economist at Banque Saudi Fransi, said there are two direct implications of a US debt default for the GCC. "The US dollar would drop in value, which would impact the region because most GCC currencies are pegged to it," he said.
"Secondly, the Gulf countries hold US foreign debt and the yield on US Treasuries will continue to depreciate, which would impact the market to market valuations for US government debt," he added.
Besides, more questions will also be raised in terms of governments and companies holding US assets.
"The Gulf countries will certainly feel the impact of any additional inflationary pressure in the US. However, the US market is resilient and there is still time for a resolution to be found. In terms of credit I do not think the US will necessarily default," he added.
Most analysts agree it is crucial that a resolution is reached before the Aug. 2 deadline.
"It is highly unlikely the US will default on its debts as all the parties involved in the discussions know the consequences are too grave," said Simon Williams, chief economist at HSBC Middle East.
"The impact of a US default would be severe not just for the GCC but for the stability of the entire global economy. There would be severe ramifications for the dollar, interest rates and institutions holding US assets.
"However, it is difficult to say exactly what the consequences will be as the world would never have seen a default on this scale before," he added.
Asian countries, in particular, are watching the developments nervously.
JEDDAH - Though it is widely believed that the US would not default on its debt, still the consequences of not reaching an agreement by Aug. 2 on the world's biggest economy's debt limit is deemed momentous by some analysts.
In effect, it would deprive the US government of its authority to borrow for the first time, whose impact would also have telling repercussions for the Gulf region.
John Sfakiankis, chief economist at Banque Saudi Fransi, said there are two direct implications of a US debt default for the GCC. "The US dollar would drop in value, which would impact the region because most GCC currencies are pegged to it," he said.
"Secondly, the Gulf countries hold US foreign debt and the yield on US Treasuries will continue to depreciate, which would impact the market to market valuations for US government debt," he added.
Besides, more questions will also be raised in terms of governments and companies holding US assets.
"The Gulf countries will certainly feel the impact of any additional inflationary pressure in the US. However, the US market is resilient and there is still time for a resolution to be found. In terms of credit I do not think the US will necessarily default," he added.
Most analysts agree it is crucial that a resolution is reached before the Aug. 2 deadline.
"It is highly unlikely the US will default on its debts as all the parties involved in the discussions know the consequences are too grave," said Simon Williams, chief economist at HSBC Middle East.
"The impact of a US default would be severe not just for the GCC but for the stability of the entire global economy. There would be severe ramifications for the dollar, interest rates and institutions holding US assets.
"However, it is difficult to say exactly what the consequences will be as the world would never have seen a default on this scale before," he added.
Asian countries, in particular, are watching the developments nervously.
© The Saudi Gazette 2011
