World Keeps Full Faith in U.S. Treasuries If Not Politics

Finance chiefs from nations holding more than $1.3 trillion of Treasuries signaled no plans to sell even as the U.S. faced condemnation for the fiscal fight plaguing the world’s largest economy.

Policy makers from Japan, India, Russia and Saudi Arabia expressed faith in the ability of the U.S. to pay its bills as the potential for default dominated the annual meetings of the International Monetary Fund and World Bank, which ended yesterday in Washington.

“There’s no other way than for the U.S. government itself and the U.S. Congress to sort it out,” Japanese Finance Minister Taro Aso told Bloomberg Television’s Sara Eisen. Fahad Almubarak, chief of Saudi Arabia’s central bank, told reporters that “the U.S. current crisis will go away and we think its effect won’t be lasting on our investments.”

The combination of criticism and confidence was echoed by Pacific Investment Management Co.’s Chief Executive Officer Mohamed El-Erian, who said the manager of the world’s biggest bond fund is still holding short-term Treasuries in anticipation of lawmakers increasing the $16.7 trillion U.S. debt ceiling.

“When push comes to shove there will be an agreement,” El-Erian told a financial industry conference during the IMF meeting. A default would “trigger failures” in collateral markets and “be a big blow to the economy,” he said.

Yields Rise

Rates on Treasury bills maturing through the end of the year rose last week as lawmakers sought a short-term compromise. Rates on bills due on Nov. 29 climbed 12 basis points, or 0.12 percentage point, to 0.16 percent last week, according to Bloomberg Bond Trader prices. Yields on benchmark Treasury 10-year notes gained four basis points on the week to 2.69 percent.

While Treasuries aren’t trading today due to the Columbus Day holiday, futures rose after Senate leaders yesterday held their first negotiating session since the government shutdown began Oct. 1. Ten-year U.S. Treasury future contracts for December delivery rose 5/32 to 126 8/32, based on electronic trading at the Chicago Board of Trade.

The Standard & Poor’s 500 Index fell 0.5 percent to 1,695.03 at 9:57 a.m. in New York. The Stoxx Europe 600 Index slipped less than 0.1 percent to 311.44.

Treasury Secretary Jacob J. Lew used the presence of foreign counterparts to highlight the risks of inaction, saying the U.S. is the “anchor of the international financial system” and its assets enjoy a haven status.

Long-term Investment

“The United States cannot take this hard-earned reputation for granted,” he told the IMF’s steering committee.

That reputation may be intact. While Treasuries have become “mildly less attractive,” Reserve Bank of India Governor Raghuram Rajan said “we are not selling our U.S. assets, we are holding on to them.” Almubarak of Saudi Arabia, the world’s largest oil exporter, said “we are long-term investors” and “our long-term view is positive.”

“Our investment in U.S. Treasuries is a long-term investment so I don’t think there’s any major need for major revisions to how our reserves are invested,” Russian Finance Minister Anton Siluanov told reporters. “What’s happening today, I hope, is a fairly short-term situation.”

As of the end of July, Japan held $1.14 trillion of Treasuries, second only to China’s $1.28 trillion, according to U.S. Treasury Department data. Russia had $132 billion and India $59 billion.

Rare Position

Attention shifted to Senate leaders yesterday to find a deal that averts a default and restores full government operations. Earlier, Senate Democrats rejected a proposal from Senator Susan Collins, a Maine Republican, saying the debt-limit increase in her plan, to January, was too short to provide certainty, and the funding extension at Republican-preferred levels, until March, was too long.

With the government now partly closed for almost two weeks and an Oct. 17 deadline looming for a boost to its borrowing authority, the U.S. found itself in the rare position of being blasted for its economic policy making by foreign officials more used to being the subject of its ire.

“There is a chance future historians will see today’s crisis as the turning point when American democracy was shown to be dysfunctional,” Former Treasury Secretary Lawrence Summers said in an op-ed in the Financial Times today. The U.S. risks becoming “an example to be avoided rather than emulated.”

‘No Schadenfreude’

“In Europe we are very concerned,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said in a Bloomberg TV interview. “There’s no schadenfreude.”

Just two years ago, then-U.S. Treasury Secretary Timothy F. Geithner used the gathering of global policy makers to warn Europe that failure to resolve its debt crisis risked “‘cascading default, bank runs and catastrophic risk.” Japan has often been lectured for not beating deflation and China for the value of the yuan.

The fear, expressed by officials and bankers from around the world, is that failure by U.S. politicians to end their logjam would roil financial markets and cause recession. That concern was reflected in a call by the Group of 20 leading industrial and emerging economies for the U.S. to take “urgent action to address short-term fiscal uncertainties.”

“It’s quite obvious that if this situation were to last a long time, this would be negative, very negative for the U.S. economy and the world economy,” European Central Bank President Mario Draghi said Oct. 12 in Washington.

Dimon, Prot

Draghi echoed others in predicting U.S. delinquency would be dodged because of the economic and financial havoc it would wreak.

A default “would ripple through the global economy in a way you couldn’t possibly understand,” said JPMorgan Chase & Co. CEO Jamie Dimon. Baudouin Prot, chairman of Paris-based BNP Paribas SA, said the consequences “would be absolutely disastrous, considering the role of the U.S. dollar.”

The state of emerging markets was the other main subject of debate as German Finance Minister Wolfgang Schaeuble said “risks have shifted” in their direction. The IMF predicts developing nations are on course this year for the weakest growth since 2009, when they helped lift the world from recession.

Transition Tension

The worry of such economies is that the Federal Reserve and other major central banks will pull back monetary stimulus too fast, prompting an exodus of capital and higher borrowing costs.

“There is transition tension,” South Korean Finance Minister Hyun Oh Seok said in an interview. The risk of a backlash means policies need to be managed “cautiously,” he said.

Emerging markets were in turn told to fortify their own economies, especially those with current account deficits. The Fed’s September decision to delay a tapering of its $85 billion asset-purchase program was viewed as buying more time for countries to act.

“Spillovers should not be an excuse for emerging economies not doing what many of them need to do,” said U.K. Chancellor of the Exchequer George Osborne.

Mexico central bank Governor Agustin Carstens said if the Fed was respon1ding to a strengthening of expansion that may ultimately be the best news.

“If the Fed manages to get a strong U.S. economy, that will benefit all the world,” he said in an interview.