DEFAULT DOES NOT COUNT

Perhaps, even at the peak of the global economic crisis, the words "default" and "recession" were not as popular in the US and the Eurozone as they are now. First, the States scare the world that they have run out of cash, then the European political and economic elite cannot reach a consensus on aid programmes to countries "drowning" in public debt, and then international organizations make gloomy forecasts about the vague and uncertain future of the global economy as a whole.

Despite the fact that all these events are taking place far from Azerbaijan and have little to do with our country, there is still cause for concern, given that the country is integrated into the global economic community. But experts believe that the impact of the new wave of crisis, if it arrives, will be minimal.

One good turn deserves another...

In the past few weeks, all economic news reports focus on only one topic: will there be a default in the US in early August and how does it threaten the whole developed world? Assumptions have been made more than once about a new wave of the global financial crisis, compared to which the collapse of Lehman Brothers will just seem a petty nuisance. Today discussions are mainly around the question of when the default will occur - President Barack Obama and Treasury Secretary Timothy Geithner are tirelessly repeating that from 2 August, the government will not be able to borrow money unless Congress decides to raise the national debt ceiling, which now stands at $ 14.3 trillion. However, some experts believe that the cash in the US treasury is enough for another 2 weeks or a month.

In any case, no one doubts that the situation there is far from being stable. For example, the international rating agency Fitch Ratings downgraded its outlook for US economic growth in 2011 from 3 to 2.6 per cent, leaving the forecast for 2012 unchanged - a growth of 2.8 per cent. "The economic growth in the US in the first quarter of 2011 was worse than Fitch expected, primarily because of the deterioration in domestic demand," the agency reported. In late June, the International Monetary Fund (IMF) also lowered its outlook for US economic growth this year from 2.8 to 2.5 per cent. However, it should be noted that while commenting on the slowdown of the US economy in the second quarter, the Fund said that this was a temporary phenomenon caused by a sharp rise in oil prices. A similar view is held by the US authorities. The head of the US Federal Reserve System, Ben Bernanke, recently said that he expects accelerated economic growth in the US in the second half of 2011. Yet, given the country's debt problems, it is difficult to say how likely this prediction is...

Meanwhile, a similar situation has come about in Europe. It is known that the pioneer in the crisis here is Greece, which has been on the verge of default since 2010 due to its inability to pay the government's debts. Despite assistance from international financial institutions, it proved impossible to rectify the situation. Moreover, after Greece, similar problems were announced by

Ireland, Portugal, Spain and Italy. The direct threat to the existence of a single European currency in these countries forced Europe to take emergency measures.

On 22 July, Brussels hosted a summit of Eurozone countries which agreed a new aid programme for Greece, which is on the verge of default, and decided to give Athens 159 billion euros for three years - 109 million euros from the EU and the IMF and 50 billion euros from the private sector.

At the same time, the deadline for allocating future loans to Greece will be extended from the current 7.5 years to 15 years. In the worst case scenario, it is possible to extend it to 30 years with a 10-year grace period. The interest rate for Athens will be only 3.5 per cent per annum against the current 4.5-5.8 per cent, according to the summit's communique. The leaders of the Eurozone countries also discussed the private sector's participation in the new aid programme. It is noted that the total cost of the participation of banks and insurance companies in the plan to save Greece in 2011-2014 will amount to 50 billion euros. In total, the private sector will lose 106 billion euros in Athens in 10 years.

Also, the Eurozone authorities decided to expand the mechanism of action of the European Financial Stability Facility (EFSF). According to the communique, the EFSF, which has a capacity of 440 billion euros, will be able to redeem, if necessary, government bonds of European countries from the secondary market and provide Eurozone countries with credit lines before these countries lose their ability to borrow on debt markets. The new mechanisms of the EFSF should prevent debt problems in large Eurozone economies such as Spain and Italy whose bankruptcy may lead to the collapse of the euro and split the European Union.

In addition, the leaders of the Eurozone promised to submit a "Marshall Plan" for Greece soon, which is necessary for the country's return to economic growth. Currently, the Greek economy is in deep recession due to "austerity" measures imposed by the EU and the IMF.

Everything is under control

Undoubtedly, the threat of recession and default hanging over the US and Europe scares the whole world. Virtually all countries are involved in the world trade and economic web, and any flaw in it will definitely create problems for everyone. It is not without reason that Fitch Ratings downgraded the outlook for global economic growth in 2011 to 3.1 per cent versus 3.2 per cent projected in March, although it upgraded the estimate for global GDP growth in 2012-2013 from 3 to 3.4 per cent. "The engine of global growth are developing economies, however, the deterioration in forecasts as a result of a tighter monetary policy in conditions of high inflation has affected them, too," agency experts say.

However, according to analysts of the European Bank for Reconstruction and Development (EBRD), what is pleasing is that the instability of the situation on the Eurozone debt markets will have a less significant impact on the CIS. But "CIS energy exporters will suffer from the onset of stagnation in the Eurozone as a possible consequence of shocks affecting markets of row materials. This can lead to a reduction in demand for row material products, including oil and gas, resulting in their high prices falling," EBRD experts say.

In the specific case of Azerbaijan, the EBRD maintains the forecast of GDP growth in Azerbaijan in 2011 at the same level of 3 per cent. According to the Bank, the inflation rate at the end of this year will account for 9.1 per cent. According to the report, the economic growth in Azerbaijan remains tempered because of the stabilization of the volumes of oil and gas extraction in the recent period. The diversification of the economy is still important because the risks associated with high economic dependence on oil became apparent during the global crisis when oil prices fell. "Foreign direct investment in the non-oil sector remains low. However, the immediate risk is mitigated by the high level of reserves of the State Oil Fund of Azerbaijan," the report says.

As can be seen, there is no obvious threat to the economy in the near future, although it would be wrong to speak about the complete absence of the impact of the situation in Europe and the US on Azerbaijan. Take, for example, the recent report of the State Oil Fund of Azerbaijan, which clearly shows reduced profitability of the investment portfolio consisting primarily of securities with a stable income. The main reason for this situation in the State Oil Fund is the lowering of interest rates on world financial markets to their lowest level in a decade. "The main reason for the decline in interest rates is that after the global financial crisis, the central banks of leading countries initiated measures to stimulate economic growth (by lowering interest rates)," the Oil Fund says.

In addition, there might be some impact on the country's foreign trade where the US and Europe are leaders in the export structure. Also, changes in the inflation process and a small decline in business activity are also possible, as was observed during the first wave of the economic crisis.

It must be noted, however, that measures are already being taken to prevent the negative impact of US and European debt problems on Azerbaijan's economy. For example, in order to ensure the international competitiveness of the country's economy, the Central Bank of Azerbaijan (CBA) will try to prevent a sharp appreciation of the manat, the CBA told Trend news agency while commenting on the possible impact of the expected default in the US on the strengthening of the rate of Azerbaijan's national currency for the US dollar.

"With regard to the priorities of the Central Bank in 2011 on inflation and financial stability, the CBA will be conducting a policy of maintaining a stable exchange rate of the manat," the CBA said. "To achieve these goals, work will be carried out on the country's currency market, if necessary, to create a balance between supply and demand." In 2009, the national currency of Azerbaijan grew by 1.8 per cent, in 2010 - 0.6 per cent, and since the beginning of 2011 - 1.4 per cent.

Earlier, Deputy Chairman of the CBA Board Xaqani Abdullayev said that the situation with the strengthening of the manat will depend on the balance of payments, but in any case, the CBA will not allow rapid strengthening. "So, if the surplus in the balance of payments last year was at $ 15 billion, this year the minimum forecast is $ 13-14 billion, but maybe, it will exceed the mark of $ 15 billion," said Abdullayev. He said the CBA has always focused on the real effective exchange rate, which is defined by two parameters - this is inflation in Azerbaijan and inflation in our trading partners. The purpose of the Central Bank is to maintain inflation in the country at least at their level. "The normal macroeconomic structure we are moving to is the ratio of money supply (M2) and inflation, that is, in the same interval as in the past year. Money supply growth is expected to reach 30-35 per cent, and the forecast of the average annual inflation rate hovers around 7-8 per cent," he said.

Thus, the world crisis is no threat to Azerbaijan. Moreover, the director of the Institute for Global Economic Problems, Natiq Sirinzada, believes that financial and economic policies pursued by Azerbaijan under the leadership of President Ilham Aliyev offer a model of neutralizing the effects of crises. "One of the most important factors in the success of this policy is a return to an increased state role in regulating the economy. Moreover, it is possible that a new economic theory will emerge, under which the state will act not only as a regulator, but also as a full-fledged market player. Effective management of state property in the country strengthens the position of supporters of state regulation. Another important factor, in our view, is restructuring, in which financial institutions gradually fade into the background, giving way to the real economy," he said.

In short, "crisis" states have a lot to learn from Azerbaijan.