Asia watches US “circus”

 
AseanAffairs     26 July 2011

Asia could only watch and pray on Monday after US lawmakers failed to break a debt impasse that threatens to trigger a default and shock global financial markets.

Asia, which holds close to US$3 trillion in US government debt, has a powerful vested interest in Washington finding a workable compromise. Policy makers and economists contacted by Reuters were confident that lawmakers would strike a last-minute deal to avert a crisis.

Investors in Asia took a defensive stance, although there was no evidence of the sort of panic selling that some politicians in Washington had feared. With just eight days left before August 2, when the Treasury Department has estimated it will run short of money to pay all of its bills, the anxiety level was rising.

Asian sources said the US debt troubles were primarily political, not economic. Finding a solution was a matter of mustering political will rather than securing rescue funding, which can be far more complicated, as Greece’s recent difficulties showed.

Xia Bin, an academic adviser to the People’s Bank of China said, “Don’t worry too much about it.”

China is the largest foreign owner of US government debt, with $1.16 trillion as of May, so a vote of confidence from Beijing carries significant weight.

Congress set the government’s borrowing limit at $14.3 trillion, but the Treasury already tapped that amount and needs more money to meet its obligations. Republicans want an agreement on spending cuts before they authorize more borrowing.

Democrats want to mix lower spending and higher taxes. Ratings agencies have warned that even if Congress raises the debt ceiling and averts a default, they may still strip the United States of its AAA credit rating, the highest possible, if lawmakers fail to agree on deeper long-term budget cuts.

US Secretary of State Hillary Clinton, speaking in Hong Kong, said she was confident Congress would secure a debt deal and “work with President Obama to take steps to improve our long-term fiscal outlook.”

A lower credit rating could raise borrowing costs not only for the US government but also for other countries, companies and consumers because Treasuries are the benchmark by which many loans are measured.

For Asian policy makers, there is no alternative to investing in Treasuries. China and Japan are by far the world’s biggest foreign owners with more than $2 trillion in Treasuries combined, and no other market in the world is deep enough to absorb that size of investment.