Monday, December 12, 2011

Sovereign Debt Crises in the US and the Eurozone:Potential Regional Impacts on Asia

Financial volatility has returned to the global marketplace amid escalating sovereign debt problems in the United States (US) and the Eurozone countries. Intense political wrangling over the US' debt ceiling, the subsequent downgrading of the US' credit rating, and fears of contagion in the Eurozone have created significant uncertainties in the market. The World Bank's Robert Zoellick has warned that markets are now entering a "new danger zone," while other analysts have raised the possibility of yet another global recession.

2. The US has recently committed to a fiscal consolidation plan, while the European Union has adopted a comprehensive package that features new financing as well as greater flexibility for the European Financial Stability Facility (EFSF). These efforts notwithstanding, the risk of debt crises and contagion remains very real, particularly with recent developments in Greece and Italy. For as long as concerns about achieving fiscal discipline and restoring growth in these economies persist, markets are likely to remain vulnerable to shocks in the near term.

3. A further deterioration in the debt positions of these economies will have serious regional spillover effects on Asia's macroeconomic management and growth prospects. Even if a full-blown debt crisis were averted, a further contraction in these economies as a result of weak fundamentals and fiscal tightening will have an impact on regional growth.

4. What are the short- and medium-term impacts on Asia of the sovereign debt crises in the US and Eurozone? Can Asia, as a region, withstand another downturn in these economies, and to what extent can Asia rely on its own internal strength for growth? How can Asia strengthen its own drivers of growth and that beyond its own border, for example, by emphasizing on efforts to strengthen trade within Asia (intraregional trade) and with other emerging markets? What are the short- and medium-term policy choices available, and what regional approaches should Asian countries take in mitigating these impacts?

5. This S-PATA will seek to answer these questions from a regional perspective by assessing how debt crises in advanced economies may be transmitted to Asia. While it will also explore national policy options to the extent feasible, it will focus on regional measures for managing the macroeconomic impacts of such crises.

6. This S-PATA will build on research being undertaken by the Office of Regional Economic Integration (OREI) on these issues, as part of its ongoing work on the Asia Economic Monitor and the Asia Capital Markets Monitor, and its research program for 2011 2012 on Growth Rebalancing (attached).

Asian Development Bank.Project Number 45291- 01