US debt crisis casts shadow over GCC economies (page 1 of 2)

Many still believe an agreement will be reached in the US to avoid the default, and an embarrassing ratings downgrade for the country. However, the scale of the issue if the worst were to happen would be huge. "For the world's currency reserve to default on its debt is unprecedented. Athens defaulting is one thing but the US government defaulting is quite another," Dr Tarek Coury, economist at Dubai School of Government, tells AMEinfo.com.

Five of the six GCC currencies are pegged to the dollar, meaning any serious economic collapse in the States would almost certainly weaken local currencies. "The thing that is going to be felt the most is the effect on the value of US currency. But it's really hard to tell what's going to happen. The knee jerk reaction saying that the dollar is going to lose value is not at all as straight forward as it's made out to be," states Coury.

"There will be the immediate reaction of the market that the dollar will lose value against the British pound, against the Yen and against the Euro. But I think it will be a temporary thing, the dollar is already at low levels at this point. So if it does go lower I doubt it will last for very long," he adds.

President Obama deep in negotiations with Republicans over debt

In order for the US to pay its debts, legislation needs to be passed by the House of Representatives and the Senate to increase the debt limit of the country. However, Republicans have demanded President Barack Obama makes significant cutbacks in spending without raising taxes, if they are to agree to the debt ceiling raise. Obama and the Democrats are unwilling to make cuts which they believe would affect the poorest social groups in the US, while not raising taxes on the rich. Should the two parties not reach an agreement, the result could be catastrophic.

"It is a dangerous game we've never played before, and we can't afford to play it now. Not when the jobs and livelihoods of so many families are at stake. We can't allow the American people to become collateral damage to Washington's political warfare," President Obama said this week.

When the dollar is performing poorly, there are those who begin to doubt the value of countries such as the UAE having its currency pegged to the dollar. However, Coury says even if the US does default on its debts, floating the dirham would be a mistake.

"People understand the dollar and at the end of the day if you are investing in the UAE knowing that there is full convertibility at all times with the dollar, it is very reassuring to you as an investor. So any decision by the central bank to repeg or to float the currency or anything like that would be really jumping the gun."

GCC countries benefit from US exports

The UAE has extremely close ties to the US, and not just through currency. A recent study by the Dubai Chamber of Commerce revealed that US exports to the UAE reached a total of $11.65bn in 2010, while overall trade between the States and GCC countries increased by 21% in the same year.

Further uncertainty in the US economy would almost certainly have a knock on effect on these figures.
The situation in the EU, with Greece recently given a 159bn euro bailout, offers no cause for encouragement either and has already affected major UAE companies.