Asian states are likely to retain their U.S. Treasury holdings for now and European governments have expressed confidence in the world’s largest economy after Standard & Poor’s cut the U.S.’s sovereign credit rating to AA+.
South Korea affirmed confidence in Treasuries after an emergency meeting of officials yesterday to prepare for any financial market fallout. Russia said the one-step cut “can be ignored,” and France questioned S&P’s reasoning. China’s official Xinhua news service said in a commentary that the U.S. must cure its “addiction” to borrowing.
For all the angst, policy makers across Asia are lured to Treasuries as a result of efforts to stem gains in their currencies against the dollar, which would impair export competitiveness. China has accumulated $1.16 trillion of the debt and is the largest individual foreign holder. Japan’s efforts to weaken the yen boost that country’s demand, and Vice Finance Minister Fumihiko Igarashi said yesterday that the Japanese government is ready to intervene again after selling the currency on Aug. 4.
“Our faith in U.S. Treasuries has not changed,” Yim Jong Yong, South Korea’s vice finance minister, told reporters yesterday in Gwacheon, south of Seoul, after meeting with counterparts from the central bank and financial regulators. The nation will step up monitoring of capital flows and currency movements because of the risk of volatility from the downgrade and Europe’s debt crisis, he said.
Asia accounts for about half of foreign-owned U.S. debt, Treasury data show. Speaking on Japan’s NHK television, Igarashi said the government may intervene again if its sees speculative trading. Last week, the government may have sold a record 4.5 trillion yen ($57 billion), according to Totan Research Co., a Tokyo money-market brokerage.
“They won’t be happy about it, but Asian central banks will just have to hold on and stick it out,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. (WBC) in Sydney. “There is pressure on them to hold on to liquid assets and there is nothing more liquid than the Treasury market. At least Treasuries have been doing well and they aren’t holding on to distressed assets.”
Investors in Treasuries earned 3.12 percent in the three months ending July 31, based on Bank of America Merrill Lynch data. The securities have rallied in recent weeks even after S&P warned it might lower the rating from AAA, as investors sought a haven amid deepening concerns that the global economic rebound may fade. Yields on benchmark 10-year notes closed at 2.56 percent Aug. 5, before the S&P announcement of the cut to AA+, down from 3.12 percent a month ago.
Japan, the second-largest international investor in American government debt, sees no problem with trust in the securities, a Japanese official said on condition of anonymity.
In the U.K., the world’s third-largest foreign holder of U.S. debt, Business Secretary Vince Cable said Aug. 6 the dollar is “the key international currency” in the short run.
“Although the American legislators made a terrible mess of things a few weeks ago they have now got things back on track and undertaken to manage their debt in a prudent way,” Cable said in an interview with the BBC.
Russia considers U.S. debt reliable and won’t review its policy of investing in the country, Deputy Finance Minister Sergei Storchak said by phone on Aug. 6. The downgrade “can be ignored” for long-term investment strategy, he said.
Russia is one of the 10 largest foreign holders of U.S. government debt. Expressions of support for the U.S. also came from the central bank governors of Jordan and Lebanon.
The S&P decision went further than Moody’s Investors Service and Fitch Ratings, which affirmed their AAA credit ratings for the U.S. on Aug. 2, the day U.S. President Barack Obama signed a bill that ended the debt-ceiling impasse that had pushed the country to the edge of default. Moody’s and Fitch both said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.
The Treasury Department said the S&P decision was flawed by putting discretionary spending levels at $2 trillion higher than the Congressional Budget Office estimates, said a person familiar with the matter who declined to be identified. S&P disputed that, saying its judgment wasn’t meaningfully affected by such spending figures.
“We can ask why this agency took this decision based on figures that are not consensual,” French Finance Minister Francois Baroin said in an interview on RTL Radio on Aug. 6. “There will be a debate in the U.S. about this decision. It’s one out of three agencies. It’s only one element.”
Treasuries have benefited from a global sell-off in stocks driven by concern that the U.S. recovery is fading as Europe’s debt crisis widens. Yields on three-month Treasury bills dipped into negative territory this month, while the MSCI World Index fell to the weakest level since November.
Over the longer term, failure by the U.S. to restrain its borrowing may spur diversification out of Treasuries. The bill Obama signed last week was a compromise from Congress that raised the federal borrowing limit while putting off decisions on specific budget cuts or revenue increases.
“This is clearly a wake-up call for the U.S. and those who think a downgrade doesn’t matter are in denial,” said Thomas Lam, Singapore-based chief economist at OSK-DMG, who accurately forecast when the worst U.S. recession since the Great Depression would end. “Markets will enforce their discipline if the U.S. doesn’t repair its credit rating.”
S&P lowered the U.S. grade citing an insufficient commitment to reducing budget deficits and stabilizing the debt burden. It kept the outlook for the rating at “negative,” saying it may be cut to AA within two years if spending reductions are lower than agreed to.
The New York-based rating company currently gives 18 sovereign entities its top ranking, including Australia, Hong Kong and the Isle of Man, according to a July report. The U.K. which is estimated to have debt-to-GDP this year of 80 percent, 6 percentage points higher than the U.S., also has the top credit grade. In contrast with the U.S., its net public debt is forecast to decline either before or by 2015, S&P said in yesterday’s statement.
To contact the editor responsible for this story: Chris Anstey in Tokyo on firstname.lastname@example.org