World investors expect US to solve debt impasse

AP News
Posted: Jun 01, 2011 4:10 PM
World investors expect US to solve debt impasse

Investors outside the United States expect politicians in Washington to solve their partisan wrangling over whether to raise the government's debt ceiling, though longer-term worries remain about when the world's largest economy will cut down on its borrowings.

Democrats want to increase the debt ceiling, a move Republicans say is ill-conceived without a commitment to spending cuts. To prove their point, House Republicans proposed just such a bill, which failed badly on Tuesday.

Markets held their cool as traders saw through the political posturing. Prices for U.S. Treasuries barely budged early Wednesday in the wake of the 318-97 vote in the House of Representatives.

Bond traders and analysts say that the idea that the dispute might somehow keep the U.S. from paying its obligations is highly unlikely, even unimaginable.

The debate will likely linger through the summer, with the Republicans who control Congress demanding a commitment to spending cuts from the Obama administration as part of any agreement to raise the limit. The U.S. Treasury has said that unless the ceiling is raised by Aug. 2, the Treasury would be forced to default, or fail to pay in time, at least some of its obligations.

Beyond the politics, however, longer-term worries about rising debt levels in the United States remain. Tuesday's vote against raising the ceiling earned a chiding note from an official newspaper in China _ the biggest foreign holder of U.S. Treasury debt with about $1.14 trillion.

An opinion column published Wednesday on the website of the People's Daily newspaper highlighted the consequences of the U.S. failing to raise the ceiling.

"If no agreement comes out," the column said, "the U.S. would be sent to another financial crisis and the global economy would face the dim prospect of another great recession."

"China ... is certainly concerned about the quagmire, as the security of the debts repayment is on the line," it said.

However, analysts said the issue wasn't high on investors' radar screens because most people believed the U.S. would find a way out of the problem.

"We think that the U.S. will pass the vote to increase the budget ceiling so we don't think it will have structural implications for Asia," said Dariusz Kowalczyk, senior economist at Credit Agricole CIB. "But obviously the nervousness that surrounds the vote and the heated political debate make it exceedingly clear to Asian central banks that Treasuries are not such a safe avenue to investors countries as they use to think."

Kowalcyzk said China has been reducing its U.S. Treasury holdings for five straight months and will probably continue to do so.

In Russia, another major holder of U.S. debt, "people are watching this as an interesting story but nobody expects default," said Alexey Moiseev, economist with Moscow-based VTB Capital.

Marc Ostwald, a strategist for Monument Securities in London, said traders were assuming that the pressure to not roil bond markets would eventually "bang heads together in Washington to achieve results." He added, however, that view was "complacent."

But for now, markets were focussed elsewhere. Foreign investors are watching the U.S. Federal Reserve's program to buy government bonds, which puts upward pressure on their prices. Central banks in Asia, meanwhile, remain big buyers of Treasuries as they try to keep their currencies from rising against the dollar by buying U.S. debt.

Tuesday's vote itself "was no big event, even if investors are aware of the importance of the debt ceiling," said Bjoern Jesch, chief investment officer at Deutsche Bank's Germany private wealth management business. Market calm "is justifiable because all market participants know that America cannot afford a payment interruptions."

The bank is advising private clients to move out of government bonds and set aside money to purchase stocks in coming months, mainly because of low yields from debt, not because of worries about the debt ceiling.


Chan contributed from Hong Kong.