Govt braces for US default

business October 17, 2013 00:00

By The Nation

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Team of financial experts to monitor situation; baht might strengthen, while Mpc assures flexibility in monetary policies



Thai authorities are preparing for negative repercussions of a possible US debt default, which poses huge risks for the global economy.

As US lawmakers engage in last-minute talks to cut a deal on the debt ceiling and avoid the country’s first-ever default, market-watchers remained optimistic that a deal would be reached before the deadline tomorrow (Bangkok time). Without a deal, the real impacts would be manifest in November.

On November 15, the US must make US$29 billion (Bt906.77 billion) in interest payments. If the economy has slowed and tax payments fall short of estimates, the government might not have enough cash and would be forced to default.

In a note, HSBC Global Asset Management said a default remained a low probability. But the impact of an eventual default could be severe. This could spark sell-offs in risk assets, given that US treasuries are the bedrock of the global financial system and are used to provide liquidity and collateral in repo transactions amongst other things.

“However, in our view the most likely scenario is a resolution to the debt ceiling impasse by a compromise agreement between Democrats and Republicans well before the end of October and possibly even in the next day or two,” it said.

Paiboon Kittisrikangwan, an assistant governor at the Bank of Thailand who is also secretary of the Monetary Policy Committee, said that the MPC yesterday also discussed preparations in the event of a default. The members still believed that a deal would be reached, even if it comes at the “eleventh hour”, as a failure would lead to substantial risks. Reflecting the consensus that a default is not likely is the absence of great changes in US Treasuries yields.

For now, it is difficult to estimate the actual impact on the Thai economy, given the close interconnectedness of the financial market and the real-economic sectors, Paiboon said. As part of preparations, the MPC promised flexibility in monetary policies and readiness to absorb excess liquidity and monitor capital movement as well as foreign-exchange rates.

Prime Minister Yingluck Shinawatra yesterday called for a brainstorming session. A team of financial experts from three key relevant agencies, chaired by their respective heads, will monitor the situation and work out possible initial solutions in case Thailand is to be affected. They will have the first meeting today.

The working panel, comprising officials from the Finance Ministry, the Bank of Thailand and the National Economic and Social Development Board (NESDB), will hold its first meeting today, Government Spokesman Teerat Ratanasevi said yesterday, citing the conclusion from the Economic Cabinet’s meeting held yesterday.

Analyses by the NESDB and the Fiscal Policy Office under the Finance Ministry showed that the real impact could be seen when the US has to repay $29 billion in interest on November 15. If the shutdown problem is not solved by then, capital outflows from the US are anticipated.

Emerging currencies, including the baht, early this year strengthened considerably, thanks to inflows to developing economies. Of late, the baht has weakened to about Bt31.30 per dollar and the trend will depend on the resolution at Capitol Hill.

“We’re not worried about a possible baht strengthening. But the shutdown would affect Thai exports, as 9 per cent of our products are dispatched to the country. There is a discussion that we might need to find new markets to cope with declining purchasing power in the country,” Teerat said.

Also discussed at the session was the Thai economic outlook, after the International Monetary Fund’s downward revision of projected Thai economic growth from 5.9 per cent to 3.1 per cent, against the NESDB’s projection of 3.8-4.3 per cent. Impacts on the US shutdown were also discussed.

BOT Governor Prasarn Trairatvorakul insisted that Thailand’s reserves remain large enough to withstand any impacts, should the shutdown continue.

Some US Treasuries held by the BOT will become due soon. This could be swapped for Treasuries with longer maturity.

Tomorrow (Bangkok time) is the day when the US government would no longer be able to borrow. As a result, it would have to spend only from cash on hand and tax revenue. It is estimated that US Treasury has about $30 billion in cash.

Sometime between October 22-31, according to the Congressional Budget Office, the government would run out of cash. It would have to slash spending by 32 per cent over the next month, according to the Bipartisan Policy Centre. Treasury would probably make its top priority the payment of interest and principal on its debt to avoid a default. Either way, some programmes wouldn’t be funded, including possibly Social Security, veterans’ benefits and Medicare.

Analysts say the default could spur China, holding $3 trillion of the total $16.7 trillion debt, to diversify its multi-trillion-dollar foreign exchange reserves.