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Asian Leaders Keep Quiet To Avoid Roiling Markets

DAVID GREENE, Host:

So that's the political landscape in the wake of the big downgrade. Now to some world reaction. With its credit rating downgraded, the U.S. has been banished from S&P's elite club of AAA borrowers. The reality: the U.S. now must look up to 18 countries with a better credit rating: Britain, Singapore, also Liechtenstein, and the Isle of Man.

In the next few hours, we'll get an early sign of the impact of the U.S. downgrade as Asian financial markets begin opening. And for a preview of what we might see there, we're joined by NPR's Anthony Kuhn in Jakarta, Indonesia. Anthony, hi.

ANTHONY KUHN: Hello, David.

GREENE: So Asian markets were closed when news broke of the downgrade. And as they open up today, are people fearing that things are really going to go haywire, we'll see big drops?

KUHN: Not necessarily. Foreign governments, such as South Korea and Australia, have warned people in the markets, have warned investors not to take this too seriously. Last week, of course, the markets dropped precipitously following news in the U.S. And so it's possible that there may be an initial drop and, who knows, maybe even a rebound sometime during the day. But we'll just have to see.

GREENE: And just so we understand this relationship between Asian countries and the U.S. - I mean, a lot of nations in Asia sell goods to the U.S. They accumulate U.S. dollars. They invest in the bond market in the United States, and, you know, some of these big creditor countries are China, Japan. What's been their reaction so far to this downgrade?

KUHN: Well, there was some initial finger wagging from China, which basically indicated that the West was in a crisis of its own making. But since then - for example, today in the Chinese press, there was an editorial, which noted that this is going to be big trouble for Asian economies, which rely on U.S. demand for their exports.

GREENE: As we see this play out, how much of the reaction statements from Asian leaders is about politics? How much will it be, you know, allies will say the U.S. economy is still strong, they're a reliable partner, and countries like China might take advantage and try to start criticizing.

KUHN: Well, I think China does see the U.S. as, you know, suffering a body blow in all of this on the magnitude of, you know, September 11, 2001 or the 2008 financial crisis, and there are many ways in which it has stepped in to, you know, fill the void. One particular area it's looking at is the U.S. dollar's reserve currency status. It's suggested that if the Chinese yuan, the Chinese currency, is not ready to step up to the role of the world's reserve currency, at least the days of the U.S. dollars' hegemony are numbered.

GREENE: It's interesting. And if the days of the U.S. dollar being so strong in the world are numbered, I mean, are we seeing a real change in the landscape in the next three, six, 12 months depending on how the U.S. kind of deals with this crisis?

KUHN: Well, you can be sure that economies in Asia are very nervous about it. One thing they're nervous about is so-called quantitative easing and the possibility that the U.S. might just try to print money, print its way out of the current mess, and that would mean a serious devaluation to the dollar holdings that China has. They're roughly two-thirds if they're more than $3 trillion in foreign exchange reserves, the world's largest. The other thing is they're very worried about further collapse in demand from Western countries. While they're trying to shift to a model, which relies more on domestic consumer demand, it takes time, and they're very worried about what's going to happen to the people who get laid off from their export sector.

GREENE: So not just watching, you know, a credit downgrade but seeing what American consumers are able to do. Americans buy less, the Asian countries start suffering.

KUHN: Yes. You know, in 2008, China responded with a massive fiscal stimulus, which really helped them ride out the collapse in Western demand. But now they have a massive backlog of bad debt on their bank's balance sheets. And so they're not in a position to do that again if the U.S. goes into a double-dip recession.

GREENE: That's NPR's Anthony Kuhn speaking to us from Jakarta, Indonesia. Anthony, I know you'll be following those Asian markets as they open up today. Thanks for joining us.

KUHN: You bet, David. Transcript provided by NPR, Copyright NPR.