July 14, 2024

China Urges U.S. to Protect Creditors by Raising Debt

Officials in Washington are locked in tense negotiations over the government debt limit, which the Obama administration says must be raised from its current level of $14.29 trillion to allow the government to pay its daily bills and service any debt coming due.

Any failure to pay due debt would effectively amount to a default, which, however brief, could shake confidence in the American economy and severely unsettle global financial markets.

Late Wednesday, Moody’s Investors Service sharpened attention on such an outcome by warning that it might cut its top-notch rating for the United States. Moody’s cited a “rising possibility” that no deal would be reached before the United States government’s borrowing authority hits its limit on Aug. 2.

On Thursday, Ben S. Bernanke, the chairman of the Federal Reserve, repeated a warning that a “huge financial calamity” would occur if President Obama and the Republicans could not agree on a budget deal that allowed the debt ceiling to be raised.

In testimony before a Senate committee, Mr. Bernanke said that lawmakers should consider the fragile state of the economy in their negotiations.

“Not passing — not increasing the debt ceiling and allowing — certainly allowing default on the debt would have very real consequences for average Americans,” Mr. Bernanke said, noting that interest and mortgage rates would jump.

“That would also increase the federal deficit because we have to pay the interest on the debt as part of our spending,” he said.

The authorities in Beijing added their voice of concern Thursday, though in more muted terms.

“We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors,” Hong Lei, a foreign ministry spokesman, said in response to questions about the Moody’s report.

The comments echoed those made by officials in Beijing in April, when Standard Poor’s lowered its outlook on the United States from stable to negative because of the country’s high budget deficit and rising government indebtedness.

China holds more than $1 trillion in United States Treasury securities, making it highly sensitive to any developments that could lower the value of those holdings.

During his testimony before Congress, Mr. Bernanke told lawmakers that if the United States did not raise its debt limit, the government would need to prioritize its financial obligations by paying its creditors first and stopping benefits like Social Security payments.

“The assumption is that as long as possible, the Treasury would want to try to make payments on the principal and interest to the government debt, because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy,” he told lawmakers.

Robin Marshall, director of investment management at Smith Williamson in London, said the rating agencies were acting aggressively toward indebted sovereign nations, having failed to foresee the subprime mortgage crisis in the United States, which foreshadowed the current debt explosion.

The current situation, he said, is creating headaches for governments — worried either about where to invest or whether they themselves will be downgraded and face higher financing costs — as well as for investors.

”It raises the question of what is the relevant benchmark?” Mr. Marshall said. “If the U.S. is downgraded, what about Germany, with its increasing liabilities? If you are looking solely at debt-to-G.D.P. levels, you may just be left with countries like Norway, Switzerland and Singapore as triple-A’s.”

In Europe, reaction was muted on Thursday to the threat to the ratings as the European authorities struggled to contain their own debt crisis, which this week threatened to spread from Greece, Ireland and Portugal and engulf the larger economies of Italy and Spain.

European officials have responded to successive downgrades of euro zone ratings — Ireland, for example, was downgraded to junk status this week by Moody’s — by criticizing the grip that the ratings agencies have over investors.

Bettina Wassener reported from Hong Kong and Matthew Saltmarsh from Paris.

Article source: http://www.nytimes.com/2011/07/15/business/global/china-urges-us-to-take-responsible-action-on-debt.html?partner=rss&emc=rss

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