Valery Yemelyanov, stock market expert at BCS World of Investments, explained to Rossiyskaya Gazeta the possible consequences of the US default:
- The situation is unusual for other countries, but common for America: the Fed has money in private banks, but they are not allowed to lend to the Treasury without the signature of Congress, which is stuck in a struggle between parties.
What is the probability of default
We are now talking about the fact that the fault – if it occurs – will be technical. Residents of the United States will not have to go through the nightmare that awaited the Russians in 1998. But there will still be consequences.
The probability of default is estimated by the prices of default swaps (it is something like insurance for holders of government bonds). They are now at historic highs. The major rating agencies are betting around 10% that there will be a default (compared to typical rates of less than 0.5%).
What will happen to the currency
The first reaction to a default is always linked to the financial markets. They bear the brunt of the consequences. And they can be very contradictory: the first reaction – in one direction, then – back.
Investors will sell US bonds and stocks, mostly banks, expecting a credit freeze in the country. A large volume of spot dollar purchases will cause its price to rise sharply against the euro and other hard currencies.
In the first days after the default, all other currency units, including the ruble, may fall sharply. For the Russians, this means a further rise in the prices of the dollar, the euro and the yuan, but above all of the dollar.
What will happen to gold
Gold is one of the few assets that can grow faster than the dollar under such conditions. The purchase of precious metals is a defensive reaction by investors who do not want to invest cash.
But, as with the soaring dollar, this will be an initial short-term reaction. After a few days, a few weeks at most, investors will start selling both the dollar and gold in order to take profits after the panic.
General advice for those who fear for their savings: if you don’t have any currencies or gold, you shouldn’t buy them just for this jump. You may not have time to sell at a high price when everything goes down.
What will happen to the oil
Commodities depend on the dollar (the rate against other hard currencies). Therefore, in the first days, there could be a strong collapse in the prices of oil, metals and wheat.
But even here, the effect is likely to be short-lived. Overall, the US default is undermining confidence in dollar assets, especially US Treasury government debt. And plays in favor of the weakening of the local currency.
It is reasonable to keep in mind that commodity markets can do much better than the stock market. Even if there is horror in the news and global indices fall sharply, on average export prices may change little.
How will this affect the economy
The United States is likely to enter a recession. A contraction in the volume of loans issued and in the flow of public spending, even if it lasts several days, could well halt the rise in US GDP.
Along the chain, this will lead to a slowdown in other major production centers, notably in Europe and China. And after them, Russia will also feel the drop in economic activity: less trade, less income.
But everything is in dollars, euros and yuan. In ruble terms, state and population revenues are governed by internal laws, including Central Bank policy and the ability of the Ministry of Finance to borrow from local banks.
What will happen to the prices
Most of the payments Russians receive (salaries, pensions, allowances) are fixed. Business income and premiums for private sector employees may decrease, but there is virtually no reduction on average across the country.
Therefore, citizens are more concerned about how inflation will grow, mainly food inflation. Curiously, if the global crisis worsens, the underlying prices could even fall. This is a normal reaction to a drop in demand.
The experience of previous external shocks suggests that price spikes can occur, but they mainly concern 100% imports or exclusive nomenclature: drugs, equipment, branded products.
Is it possible to make money on this
The US default, like any failure in the global economy, benefits few. It is possible that the poorest countries with low credit ratings will be hardest hit. It can start a parade of full-fledged flaws.
Russia is isolated from foreign markets and does not have large foreign currency debts. On the other hand, this is not the best time for the Russian economy to face new problems, for example, the crisis in the CIS neighbors.
In terms of personal finances, it is wise to stock up on savings for at least two months. If you have enough money for more, you can invest it in safe bonds or save it to buy blue chips when they crash amid the general panic.
Events like this happen every few years. And, as a rule, those who managed to buy cheap shares in large companies after the crisis receive a much greater increase than those who invested in a period of calm.
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