French, British and Russian officials expressed confidence in the U.S. after the world’s largest economy had its debt downgraded.
“France has total confidence in the solidity of the American economy and in its fundamentals,” Finance Minister Francois Baroin said in a statement to Agence France-Presse. U.K. Business Secretary Vince Cable said the dollar is “the key international currency” in the short run. Russia said it won’t review its U.S. investment policy.
Standard & Poor’s yesterday lowered the U.S.’s AAA credit rating for the first time, reducing it by one level to AA+ with a negative outlook, indicating a potential further downgrade. The credit evaluator criticized the nation’s political process and lawmakers for failing to slash spending enough to narrow a record budget deficit.
The U.K. is the third-largest international investor in U.S. government debt after China and Japan, according to Bloomberg data. Europe’s leaders joined Asian investors, who are likely to retain their Treasuries holdings for now, with options limited by the region’s foreign-exchange rate policies. Japan sees no problem with trust the securities, a government official said on condition of anonymity.
The current U.S. grade is two steps higher than the AA-level shared by Japan, which S&P has warned may see a downgrade, and China. S&P gives 18 sovereign entities its top ranking, including Germany, France, Canada, the Netherlands, Australia, and Hong Kong, according to a July report.
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 today, adding that the credit-rating downgrade “can be ignored.” Russia had $478 billion of currency reserves in July, the world’s fourth largest, and was one of the 10 largest foreign holders of U.S government debt.
Russian Prime Minister Vladimir Putin this week said Americans “are living beyond their means and transferring part of the problems onto the world economy.”
The central bank of Saudi Arabia, one of the oil exporting nations that together are the fourth-biggest holders of U.S government debt, didn’t respond to questions faxed by Bloomberg. Spokespeople from the German finance ministry and Norges Bank Investment Management also declined to comment.
France joined the U.S. government in questioning S&P’s reasoning. The U.S. Treasury Department said S&P estimated discretionary spending levels at $2 trillion higher than the Congressional Budget Office, said a person familiar with the matter who declined to be identified. S&P says 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,” Baroin said in an interview on RTL Radio. “There will be a debate in the U.S. about this decision. It’s one out of three agencies. It’s only one element.”
Moody’s Investors Service and Fitch Ratings have maintained their top grades for the U.S. Both Baroin and Cable said the U.S. government is getting a grip on its debt.
“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.
Baroin said G-7 finance ministers are in permanent contact to discuss the financial situation. He didn’t answer questions about Italian Prime Minister Silvio Berlusconi’s call last night for a meeting of G-7 finance ministers.
Berlusconi, German Chancellor Angela Merkel, French President Nicolas Sarkozy, and Spanish Prime Minister Jose Luis Rodriguez Zapatero spoke by phone yesterday about the European debt crisis, and Merkel and Sarkozy also spoke with U.S. President Barack Obama.
World stock markets have lost more than $4.4 trillion since July 26 as speculation mounts that the global economy faces a new recession that would deepen Europe’s debt woes. The Stoxx Europe 600 Index fell 9.9 percent this week, and the MSCI World Index slumped 8.5 percent. For both, it was the worst week since November 2008.
While yields on Italian and Spanish debt fell yesterday, they have surged since the July 21 European Union summit aimed at heading off debt contagion. Italian 10-year bond yields are up 76 basis points since the summit, while Spanish yields are up 33 basis points.
U.S. Treasuries rallied even after the S&P warned it may lower its rating, 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 yesterday, before the S&P announcement of the cut to AA+, down from 3.12 percent a month ago.
Nigeria, also part of the oil-producing group, is “conscious” of economic developments in the U.S. and Europe that may have “significant” implications for the West African country’s budget if they affect oil prices, the central bank’s deputy governor said. Polish Prime Minister Donald Tusk said on TVN24 television he “hopes” there won’t be a “radical impact” on his country’s economy, adding that there’s no need to panic.
In Asia, South Korean officials added S&P’s cut to the agenda of an emergency meeting on global financial turmoil tomorrow, Hong Kong’s central bank said it would monitor any fallout and China’s official Xinhua News Agency said in a commentary that the U.S. must cure its “addiction” to borrowing.
“Because the U.S. market remains the most liquid and deepest and as Europe still faces uncertainty, the U.S. market is not likely going to experience a huge sell-off, even with the one-notch downgrade,” Philippine central bank Governor Amando Tetangco said in an e-mailed statement. He added that the downgrade still leaves Treasuries within “allowable” investments for the central bank.
Tetangco added that “many still see the U.S. Treasury market as a safe heaven.”