Dollar's reserve role at risk from U.S. budget uncertainty - ECB's Nowotny

October 12, 2013

VIENNA-AUSTRIA (Oct 12)   The dollar's role as the world's leading reserve currency is at risk because of the political impasse in the United States, which has raised fears of a debt default, European Central Bank policymaker Ewald Nowotny said.

President Barack Obama and congressional Republican leaders inched toward resolving the standoff on Friday, but struggled to agree on a short-term deal to increase U.S. borrowing authority beyond an Oct. 17 limit and to reopen the government.

"If it really comes to a collapse, no one knows exactly what will happen. One expects that there are chances to postpone the effects but by the end of the year at the latest it will be rather dramatic," Nowotny told Austrian broadcaster ORF in an interview aired on Saturday.

"It is apparent that it is extremely dangerous when the politics of a country whose currency is the world currency - it is still the most important currency - are driven primarily by very narrow domestic considerations," he added.

"This discrepancy is very dangerous and in my view will have a negative impact on the long-term role of the dollar."

Interviewed in Washington during meetings of the International Monetary Fund and World Bank, Nowotny said jitters over the U.S. budget standoff were already pushing the euro higher.

This was not such a big problem for Austrian exporters but posed more of a threat to southern euro zone members, said Nowotny, who is also governor of the Austrian central bank.

Jobless rates in Europe were still too high, he said, noting that the euro zone economy would contract this year. He said Europe needed to reduce budget deficits but not so abruptly that it created a negative impact on the economy.

Policymakers will likely know only by mid-2014 whether Greece will need a third bailout package, he said, adding: "An immediate aid programme is not in sight."

Nowotny expressed confidence that Austrian banks such as Erste Group and Raiffeisen would pass stress tests that major European lenders face next year.

"There is a fear that a certain nervousness will arise in the overall European banking system in connection with stress tests. In such a sensitive situation it is good to be in a position of strength and I am sure the Austrian banks will achieve this," he said.

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