“Экономические науки” 2.Внешнеэкономическая деятельность.

IBBS 338.27 Ihor Pluharzh

Second year student

Petro Mohyla Black Sea State University

Economic Science Faculty

Specialization: Finance and Credit with the knowledge of English

Tutor: Associate professor of the Department of

Professional English Education Khmyzova O.V.

The consequences of possible U.S. default for Ukrainian economy

Actuality. In globalization times, Ukrainian economy is closely linked with the world economy, especially with the U.S. one. Hryvnia becomes more tied to dollar and there is the dollarization of an economic life in the country. The issue about the possible consequences of the default in the U.S. for the Ukrainian economy is the main for the Ukrainian economists in 2013. Topic actuality is conditioned by the fiscal crisis and the rising of the U.S. public debt to the maximum level leading to the collapse for the American economy and the negative impact on the Ukrainian economy as Ukrainian gold and foreign exchange reserves consist of almost 50% of the United States securities.[2] The negative is the fact that the national currency is based on the dollar, while almost all countries refused from such monetary policy by going to the currency basket. This topic is actual and up-todate not only for specialists in economics but also for the general public, as every Ukrainian citizen directly or indirectly is faced with the dollarization, as the price of many imported goods is based on the dollar. Moreover people prefer keeping cash savings in stable currency such as dollar or euro.

Connection with scientific research

The problem of dollarization in Ukrainian economic science was violated by the following scientists: Э. Берг, Э. Боренштейн (Полная долларизация: преимущества и недостатки), О. Береславська (Доларизація в Україні та шляхи її подолання), С. Мойсєєв (Экономика долларизации). But the problem of dollarization in the Ukrainian economy is still explored not enough. Terms and nature of state crisis were investigated by К. Рудый (Финансовые кризисы: теория, история, политика.) Fiscal policy and budget of Ukraine were investigated by І. Сало, І. Дьяконова, А.Єпіфанов (Бюджет і фінансова політика України). The essence of the U.S. public debt was investigated by T. Chessman in his book «Understanding the United States Debt», which provides an understanding of the current U.S. economy and a possible default.

Goal. To define the causes and conditions leading to a default in the U.S, dependence of the Ukrainian economy on the U.S. one and analyze the scope and define the dollarization level of the country.

Tasks. To define the consequences of dollar depreciation for the Ukrainian currency. To propose the methods for reducing the impact of the budget crisis in the U.S. on the hryvnia exchange rate and economy.

Body. Default occurs when a debtor has not performed his legal obligations according to the debt contract. A default is the failure to pay back a loan. National default means the government unwilling or unable to pay a required national debt. [3] U.S. national debt - debt of the U.S. federal government to its creditors. They are: China (1169,9 bln. U.S.), Japan (1083 bln. U.S), OPEC (254,5 bln. U.S), Brazil (237,4 bln. U.S) and other countries, natural and legal persons. Total national debt amounted to - 16 747 419 536 935 U.S. $, which is 106.6% of GDP. [1] Magnitude of U.S. government debt at any given time - the cumulative result of budgets’ deficits and surpluses for all the previous years. Throughout the history America's federal budget often led to the deficit. And the proficient budgets made it possible to repay a part of the debt. But, it’s important to understand that the U.S. public debt does not include the debts of the individual states, corporations or individuals and future obligations for social assistance payments. U.S. may declare a default when the public debt exceeds the maximum level approved by the budget law. Last time national debt ceiling was raised in October 2013, when the President signed the interim budget approved by Congress. However, the bankruptcy of the United States did not disappear from the agenda, but it was so far only postponed for a few months. As the U.S. daily form debts for two billion dollars, [1] then very soon the world's largest economy can become formally insolvent. In March 2013 the U.S. national debt per capita was about 53 thousand dollars, while GDP per capita was only about 46 thousand dollars[1] making impossible to reduce the debt in the near future. Extrapolating past tendencies of change public debt in the medium and long term, the author states that U.S. economy may soon collapse. Economists distinguish 4 U.S. defaults, but the new one can have the worst consequences due to the dollarization of the economies and also Ukrainian one.

Ukrainian economy dollarization started from the declaration of Ukraine's independence. Such dollarization was caused by people's distrust to the unformed stable banking, hyperinflation and by the currency instability. Since then, the scale of dollar penetration into the Ukrainian economy significantly increased because of the Ukrainian economic globalization, political and economic instability in the country, rising inflation, increasing the level of the market openness, the national currency instability, borrowing public policy, preponderance of imports over exports, underdevelopment financial market, legislation imperfection and so on. Ukraine has a shadow dollarization, particularly when the foreign currency serves as a measure of value, medium of exchange (transactions between citizens, between enterprises), as well as a semi-official dollarization when the foreign currency has accumulation functions. Dollarization of the Ukrainian economy has positive aspects, but they are temporary and insignificant compared to its harmful effects. One of such disadvantages is the dependence of the Ukrainian currency оn the dollar, namely on American economy, which latest years does not have a solid foundation. One of the major problems is the increased volatility (variability) of U.S. currency. Some experts argue that the dollar will significant fall. This will lead to chaos in the financial sector of Ukraine. Because metals, agricultural products Ukraine sells for dollars. It should be noted that the National Bank of Ukraine for several years holds the hryvnia exchange rate. And if the crisis in the U.S. does not stop, then the strategic reserves of Ukraine will start reducing because the state will use its gold and currency reserves to support its economy. But lately reserves greatly reduced and the most of them depends on the dollar. Also Ukraine will have problems with loans because of the IMF can reduce or refuse giving the credit which Ukrainian economy needs because IMF resources will be used for the maintenance stability of the dollar in the default. The possibility of entering debt’s capital foreign markets will suffer, investments will be taken back from the country because it are very bad conditions for doing business and in fact the foreign investors do not make profits here. Other countries are also dependent on the situation in the U.S., and they will also take back their assets from Ukraine. However, if the dollar falls, it could strengthen the national currency, but likely dollar exchange rate will not change because in the U.S. Federal Reserve Bank is responsible for money that is nothing to do with the government.

Having analyzed the information about Ukrainian economy the author is inclined to think that Ukraine can be only tangentially affected by the crisis in the U.S., and the consequences will be only temporary. So, no one can precisely predict when the U.S. will declare a default, but everyone knows that sooner or later this will happen. That is why the Ukrainian government must pursue a policy of strengthening the national currency. First of all for reducing dependence on the U.S. economy - dollarization in Ukraine must be reduced. Government policy should include following areas of reduction of dollarization:

1. forming a balanced state budget

2. reducing public debt and Ukrainian dependence on foreign loans

3. promote the development of investment spheres

4. formation of stable financial markets

5. reducing the share of loans in foreign currency

6. increasing of import transactions over export ones

These measures will contribute to increase the competitiveness of the domestic economy and currency. However, it is understood that the tax on the purchase of currency can be seen as a source budget revenue rather than as a serious barrier to the dollarization of the economy. Another solution is to form a currency basket. Now the cost of the national currency is determined by only one benchmark - the U.S. dollar. Because of this, the hryvnia is strongly undervalued and is subjected to great risks. But formation of hryvnia exchange rate on the basis of multi-currency basket will help our country to reduce external risks.

Conclusion. Since independence, the Ukrainian economy is associated with the American one and directly or indirectly depends on the dollar exchange rate. This dependence is due to the fact that Ukrainian gold and foreign exchange reserves consist of almost 50% of the United States securities, [2] the national currency is determined by dollar and may be the most important issue is the dollarization. And in the case of default in the U.S. such dependence will probably lead to negative economic consequences in Ukraine. Therefore, the Ukrainian government must pursue a policy for strengthening the national currency and decrease dependence on the dollar to reduce the negative impact of currency fluctuations and the possible U.S. default. Maybe it will take decades to make the Ukrainian economy more stable and independent but surely it should be done.

Reference

1. Executive office of the president of the United States, “Fiscal year 2013 budget of the U.S. government”, 2013, p. 256.

2. Minfin [electronic resource]. - Mode of access: http://minfin.com.ua/

3. Wikipedia [electronic resource]. - Mode of access: http://www.wikipedia.org/