Playing a game of brinkmanship, the United States government may just end up hurting itself as other countries start to plot out long-term strategies to find replacements to the greenback as the world’s de facto currency.
A senior official of the Philippines’ central bank said that the US government risks losing its “exorbitant privilege”—being the issuer of the world’s most used currency—if its polarized Congress were to continue flirting with disaster by waiting to resolve a potential crisis at the eleventh hour.
“In economics, it’s called the game of chicken. The first one who blinks loses. The problem is, if nobody blinks, you’ll have catastrophe,” said Felipe Medalla, a member of the Bangko Sentral ng Pilipinas (BSP) Monetary Board.
Medalla said last week’s debt ceiling talks in the United States, which was resolved by Congress just hours before the United States were to default on its debts, revealed that there was a real need to find alternatives to the US dollar as the world’s international reserve currency.
The US government nearly reached its legal borrowing limit, also known as the debt ceiling, last Oct. 17. If it failed to beat the deadline, the United States would have defaulted on maturing US treasuries which, until recently, were considered a risk-free instrument.
Last week, Fitch Ratings put the US government’s sovereign credit rating on negative watch, indicating a potential downgrade in the next few months.
The short-term deal reached by the US Congress last Oct. 16 would enable the government to borrow until February next year.
In a statement last week, BSP Governor Amando M. Tetangco Jr. said the longer term consideration was, “when and in what form a more durable solution would be reached.”
Tetangco said the ability of the US Congress to come up with a long-term solution was also questionable.
Markets must keep an eye “on forthcoming negotiations and, depending on how these will evolve, confidence can either improve or remain low,” he explained.
Medalla, a former Socioeconomic Planning secretary, said it was unlikely that the Democrats in the US Senate and the House Republicans would allow the world’s largest economy to default on its loans, which could trigger a crisis worse than the global financial meltdown of 2008.
“The thing to do is to expect that cooler heads will prevail…. It’s not in their interest to [default on loans],” Medalla said.
And even if the United States were to default on its loans, he said, most of the US treasury notes held by the Bangko Sentral ng Pilipinas would mature over the medium term. This means that the non-payment of the United States will not directly affect the country’s foreign exchange reserves.
“The only way to punish the US is over the long term, as the world tries to find an alternative currency. But for now, the options are limited,” Medalla said.
One possible alternative is the euro, he said. But the euro zone’s economy remains weak, undermining the currency’s stability.
Another potential replacement to the greenback is the Chinese yuan, the currency used by the world’s second largest economy.
But Medalla said that, unless China allows its currency to move with the market—instead of pegging its value to the US dollar—the yuan may not be considered a serious alternative.
“We’re stuck, and we hope that people are reasonable and rational. The much dreaded catastrophe will not happen,” he said.