“Republican negotiators prevent US insolvency and its impact on global financial markets”

Republican negotiators today agreed with the White House on the US public debt ceiling in the spring of Central European Time. They thus managed to prevent the insolvency of the USA, which would have occurred in June this year in the event of a disagreement. This bankrupt state of the USA, even if it lasted only a few days, or even hours, would cause tremors in the world’s financial markets.

The agreement is thus a good start not only for American stocks, but also for the Czech Republic and the koruna. In the past days and weeks, domestic shares and the Czech Republic have come under selling pressure, first and foremost because of nervousness about the insolvency of the US.

Since its danger is now universal, it can be assumed that a noticeable pressure on the growth of the stock market will be lost, as well as on the strengthening of the krone. This should sing especially against the US dollar, which, on the other hand, will find itself under pressure to weaken. The dollar represents a so-called safe haven for times of uncertainty.

If the uncertainty decreases now, international investors will show a tendency to get rid of the dollar and dollar-denominated assets such as long-term US government bonds and buy, on the contrary, less safe assets, including the Czech crown or Czech stocks.

Luk Kovanda, Ph.D.

Chief Economist, Trinity Bank