General

What impact will a US debt default have on international trade? The risk of US debt default continues to increase. The Congressional Budget Office (CBO) warned on May 12th that if the parties do not reach an agreement on the debt ceiling, the United States will face "significant risks" in the "first two weeks" of June and will not be able to fulfill its payment obligations.

On May 11th, US Treasury Secretary Yellen, who was attending the G7 finance ministers' meeting in Japan, once again urged Congress to reach a consensus on raising the debt ceiling. "Otherwise, it would seriously damage our credit rating, trigger economic and financial disasters, and seriously damage the US and global economy," and "could weaken the US's global economic leadership position

Will lead to a decline in the strong position of the US dollar

Yellen's warning is not alarmist.

Bernard Yaros, research assistant Director of Moody's, a credit rating agency, predicted that if the U.S. debt default lasted for several weeks, it would cause an economic recession at the level of financial crisis in 2008. The US government will completely stop borrowing before July or August and have to cut government spending, which will have an overwhelming impact on economic growth.

As international investors' confidence in the value of US bonds wavers, US bonds, as one of the safest investments in the world and regarded as the cornerstone of the world financial system, will depreciate significantly, and the impact will spill over to the global financial markets.

Philipp Hildebrand, vice chairman of BlackRock Investment Management Company, warned at Bloomberg New Economy Europe Forum recently that "the default of US debt will threaten the basic pillar of the global financial system and will never happen".

At present, about 70% of U.S. debt is held by the U.S. banking system, and the remaining 30% is held by overseas investors and other central banks, including Japan, which held $1.1 trillion as of the fourth quarter of last year, China, which held $980 billion, the United Kingdom, which held $870 billion, and India, which held $220 billion. In addition, investment funds and sovereign wealth funds located in the Middle East, Norway and other places also hold a considerable amount of US debt.

If the decline in US bond prices triggers a wave of underweight, the shortage of US bond buyers will lead to a liquidity crisis, directly constraining the effectiveness of the Federal Reserve's monetary policy implementation and further increasing the difficulty of central banks around the world in their efforts to control inflation.

As an asset, the attractiveness of US bonds to global allocation of funds has decreased, and it will also have an impact on the attractiveness of US dollar assets, leading to a significant depreciation of the US dollar and causing chaotic fluctuations in exchange rates. The decline in the strong position of the US dollar may also trigger discussions on the alternative currency of the US dollar.

Beth Hammack, Global Finance Director of Goldman Sachs Investment Banking, stated, "A US bond default would pose a risk to the US dollar's position as the world's reserve currency. Anything that undermines the US dollar's position as the safest and most liquid asset in the world would be detrimental to the American people and government themselves

Global trade may be more difficult

Based on historical experience, an overly weak US dollar will increase international trade market volatility and push up the prices of oil and other commodities. In November 2007, when the US dollar index reached its lowest point, gold prices briefly rose to a millennial level of 220% at $815 per ounce.

The depreciation of the US dollar relative to other major currencies will also lead to a surge in domestic import prices in the United States and trigger imported inflation. If linked to the US debt liquidity crisis, inflation may rapidly soar.

Bryce Engelland, an analyst at Thomson Reuters, said that the rapid currency exchange caused by the sharp drop of the US dollar due to the instability of the US treasury bond bonds would lead to chaotic fluctuations in the exchange rate. Countries will seek to minimize their dependence on the US dollar as an international reserve and trade currency, including establishing new and more isolated trade blocs, and making the global economy more fragmented. The resulting trade barriers and global supply chain barriers will work together to make global trade more difficult.

In the worst-case scenario, this could mean the collapse of the US dollar and the replacement of the US dollar as a global international trade currency, "said visiting professor Swaran Singh at the University of British Columbia

If the global trading system lacks a dominant currency, trade groups may set trade barriers in the form of demanding the choice of their own currency. For example, the second largest currency, the euro, will largely replace the US dollar, while the renminbi will maintain a strong influence in the Asian region.

Lauren Henderson, an economist at Stratford Financial in the United States, said: "The ongoing uncertainty is putting pressure on the US dollar, which has already been suppressed by other countries that are beginning to break away from the dominance of the US dollar, such as Russia

Tom Nakamura of Hongfu Fund AGF also stated that if there is a real debt default in the United States, the direct reaction of the financial market will be bearish against the US dollar, including the euro and Swiss franc, as well as commodities such as gold, which may benefit greatly.

A study by Rabobank, a Dutch bank, shows that the US dollar has performed the worst among G10 currencies in the past month. According to data from the International Trade and Monetary Fund, the US dollar accounted for 58.4% of global central bank foreign exchange reserves in the fourth quarter of last year, significantly lower than about 70% when the euro was introduced in the late 1990s.

For underdeveloped economies and financially fragile countries around the world, the increase in US bond yields will directly drive up market interest rates. If the United States defaults on its debt, it will have a very serious impact not only on the United States but also on the global economy. Rising interest rates have already harmed some countries, especially those facing debt difficulties and vulnerabilities, "said Julie Kozack, a spokesperson for the International Monetary Fund. The organization estimates that 15% of low-income countries are in debt distress and 45% are at risk.