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Reserve-rich Asia holds its nose and keeps buying US debt

Reserve-rich Asia holds its nose and keeps buying US debt
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First Published: Thu, May 12 2011. 02 09 PM IST
Updated: Thu, May 12 2011. 02 09 PM IST
Tokyo/Mumbai: Asia’s reserve-rich nations see no viable option but to keep on purchasing US government debt despite their uneasiness about Washington’s fraught political battle over public spending.
Interviews with policymakers from several Asian countries -- including Japan and China, the two largest foreign holders of US debt -- showed officials were concerned that US lawmakers would fail to authorize additional government borrowing before a $14.3 trillion debt limit is reached.
But they still considered US Treasury debt the safest bet, particularly with so much uncertainty surrounding Europe’s sovereign debt situation.
None of the officials said investment plans would change right away, even if Congress does not raise the debt ceiling this week. The debt limit will probably be reached on Monday, and the Obama administration has warned of “catastrophic” consequences if the government cannot pay its bills.
“The US is making the most of having the dollar as key reserve currency and such a situation would not change immediately,” Japan’s deputy finance minister, Fumihiko Igarashi, told Reuters.
“But nothing will last forever, as with any political and economic conditions,” he added. “We will closely watch developments” in the US Congress.
Japan held $890.3 billion in US Treasuries as of February, the most recent month for which US Treasury data on foreign holdings are available, ranking behind only China on the list of the largest foreign creditors.
Igarashi said Japan should aim to diversify its reserves to reduce Treasuries exposure, perhaps by increasing gold holdings or raising the percentage invested in euro assets. But he acknowledged that a portfolio shift would be “quite difficult... because selling Treasuries would hurt our own assets.”
Safety First
Reuters spoke with about a dozen senior policymakers across Asia, many of whom insisted on anonymity in order to speak more candidly about sensitive fiscal policies.
“There is no choice for us apart from investing in US Treasuries,” said an India’s Reserve Bank of India (RBI) official with direct knowledge of external investments. “We don’t think about profitability. For us, first comes safety, then liquidity and lastly returns.”
About 55 to 60% of India’s roughly $300 billion in foreign currency assets is invested in US securities.
The Indian official said the euro zone was “uncertain” right now, making it a less attractive investment option. There was a lot of “confusion” over the fate of Greece, which may need more aid on top of last year’s bailout, the official said.
The Federal Reserve, the US central bank, held $1.44 trillion in Treasury debt as of 4 May, exceeding even China’s vast holdings. But the Fed is scheduled to wrap up a $600 billion bond-buying program next month, and some prominent investors have questioned who will step in -- particularly if Congress can’t come up with a debt limit extension.
Laurence Lau, head of the Hong Kong office of China Investment Corp, told reporters that US borrowing costs may rise once the Fed wraps up its buying binge, leading to small losses for debt holders. But he dismissed the idea that the United States would ever renege on its obligations.
“US Treasuries are safe investments, and the US government will pay back its debts, there is little concern about that,” he said.
Even if Congress does not lift the debt ceiling this week, the Treasury Department has said it has some manoeuvring room to fund the government until 2 August. An increase of about $2 trillion is needed to ensure enough borrowing power through the November 2012 presidential election.
But failure to find a compromise would heighten concerns that Washington lacks the political will to address its fiscal troubles, both short- and long-term. Ratings agency Standard & Poor’s threatened last month to downgrade the United States’ prized AAA credit rating unless the Obama administration and Congress find a workable compromise to shrink the deficit.
For South Korea, which invests nearly two-thirds of its $300 billion in reserves in US dollar assets, the debt ceiling debate was “increasing the uncertainty” over US debt, said a senior official with direct knowledge of the country’s foreign reserves management.
The official declined to comment on whether the Bank of Korea would increase or decrease its purchases of Treasuries if Congress failed to strike a debt ceiling deal.
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First Published: Thu, May 12 2011. 02 09 PM IST