But the rest of the world has no such leverage over the United States as it lurches toward a Thursday deadline and a possible sovereign default.
Even as it puts other countries at risk, the United States is able to behave as it does because of the dollar’s privileged status as the world’s main reserve currency. The dollar and the mammoth market for securities issued by the U.S. Treasury serve a number of roles in the world economy — functioning for some as a safe investment, for others as a money-management tool to stash excess cash, and for others as a broadly accepted means of exchanging goods and services.
Other types of money can serve those roles. The euro is widely accepted in trade finance, for example, and Swiss bonds are considered as safe as those issued by the U.S. Treasury. But the United States is the only country with a large enough market, a freely traded currency and sound enough credit to absorb virtually any amount of money that the global financial system demands.
The paradox: That also means there are fewer constraints on its leaders.
Just ask former Italian premier Silvio Berlusconi, forced from office in 2011 over his country’s budget problems by the sort of outside pressure missing from the current U.S. debate.
When other nations manage their finances irresponsibly or get caught shorthanded by a change in economic conditions, markets shut them out and a debt crisis ensues. Sometimes that ends in default, sometimes in a restructuring of debts, but almost always with substantial economic damage.
With D-Day approaching in Washington, there’s no sense that world markets or organizations such as the International Monetary Fund could or would put the same binders on the United States that they put on Greece during the recent euro crisis, or on dozens of other nations that have defaulted on bonds or been forced to restructure.
Some analysts have even conjectured that the United States could skip its bond payments for a while and not suffer a serious rise in interest rates or lose the ability to sell new bonds needed to finance government budget deficits.
U.S. bonds “are reliable securities, and we do not plan any serious changes” in Russia’s holdings of U.S. government investments, Russian Finance Minister Anton Siluanov said last week. “At this point, there is no need to adjust.”
Officials from other nations, speaking in numerous television, news service and other interviews in recent days, have said roughly the same, evidence that there is no pending rush to the exits.
There are plenty of nations that would have liked the same slack from global markets — or from the United States.
Run down the list of government financial crises in recent decades, and Washington has often been an important arbiter of the resolution — working bilaterally or through its influence as the chief shareholder of the IMF to shape the requirements of bailout loans, and sometimes resisting any financial rescue unless its conditions were met.
The United States and the IMF never came to terms with Argentina in 2001, and a default ensued that is still being worked out. The United States pushed demands for the end of “crony capitalism” in Indonesia, sold tough love to the South Koreans and leaned heavily on Europe over the past three years to come to grips with the fact that Greece was insolvent.
But the United States itself? Foreign leaders have had to settle for a demand from the sidelines: Please follow your own advice.
In Asia, where the United States was a strict taskmaster in that region’s crisis in the 1990s, the events of the past few weeks have seemed so wrongheaded, “it requires grading from an elementary school teacher,” said Singapore’s finance minister, Tharman Shanmugaratnam: “Room for improvement.”
Meetings of the IMF and the World Bank last week became a multi-day variation on the theme — of how the United States was risking another recession, of how disruptive a U.S. default would be, of how mystifying it was that the world’s most powerful nation seemed unable to make basic decisions. The public language was diplomatic, with deference to the American political system and faith that a solution would be found.
In private, the words were sharper.
“Embarrassing,” one member of the IMF’s governing board said of the U.S. impasse, which, by the reckoning of many analysts, is the chief near-term threat to the world’s tentative economic recovery.
China’s official Xinhua News Agency said the situation demands that the world be “de-Americanized” to diminish the importance of the dollar and lessen its ability to cause trouble.
Nations in the position of “exorbitant privilege” that comes with issuing a reserve currency change only under the pressure of longer-term dynamics, said Stephen King, chief economist at HSBC.
A parallel, he said, was Spain in the 16th century, which used its global silver hoard to import lavishly and finance trade deficits that, in effect, transferred its future potential growth to then-rising powers such as England. Over time, England and its pound sterling overtook Spain, only to lose that perch to the United States — which relies on China, Japan and others to finance its government and trade deficits.
“The point is that if you happen to be in the position of having the world’s reserve currency and you live beyond your means for many, many years, you are in some sense passing the baton of success to other countries,” King said. “There is potentially some long-term damage.”