Their worries stem from an inescapable reality: for other governments, there is still no good alternative to holding the almighty dollar, or American Treasury securities, even if the United States gets tarnished by a once-unthinkable credit downgrade.
China, which has the most to lose because it holds the largest amount of Treasuries — at least $1.16 trillion — offered a blistering attack on Washington on Friday, calling for a show of responsibility and an end to the partisan bickering.
“The ugliest part of the saga is that the well-being of many other countries is also in the impact zone when the donkey and the elephant fight,” the state-run news agency, Xinhua — considered the propaganda arm of the Communist Party — said in an opinion piece Friday, referring to the standoff between Democrats and Republicans.
Xinhua said the “irresponsible” brinksmanship in Washington risked “strangling the still fragile economic recovery of not only the United States but also the world as a whole.”
Officials in Europe were more diplomatic, but archly recalled that American leaders had admonished them just a few weeks ago to straighten out the messy politics of the Continent’s own debt crisis.
“One could now ask why is the U.S. debt treated any better than a country like Portugal, which has about the same levels of deficit and debt,” said a senior European policymaker, who spoke on condition of anonymity.
The main concern in Europe is that a Washington failure to lift the debt limit will cause the dollar to weaken further, pushing up the euro and making it harder for Europeans to work out their problems.
That is also among the worries for Japan, the second biggest among United States creditors, whose post-tsunami economic problems would only worsen if the yen rises further against the dollar.
Around the world, many leaders seem to expect the Washington showdown to somehow end in an uneasy truce, given the dire global and domestic political consequences of failing to do so.
But while no one seems to expect the United States to default on its debt, governments elsewhere are girding for the repercussions of the likely tarnishing of America’s sparkling credit rating.
Analysts expect China to continue buying American debt, because China keeps producing big trade surpluses that bring in dollars, which must then be reinvested in a haven, like United States Treasuries.
Except that Treasuries may no longer seem as safe as they once did. And China knows it. The Xinhua article warned that China may be “forced” to reduce its purchases if the United States government were to lose its triple-A rating.
There are limits to cutting back because other large bond markets, in Europe and Japan, are not nearly as liquid. “As long as the dollar remains the dominant currency there’s little choice for many in the public sector but to hold U.S. debt,” said the senior European policy maker.
That sentiment is widely shared.
“You still cannot find an asset as safe as U.S. government bonds, even if there is a credit downgrade,” said Choi Jong-ku, South Korea’s deputy minister for international affairs at the Ministry of Strategy and Finance.
And yet, that does not mean countries might not slightly reduce their purchases of long-term American debt, as China and some others have already shown signs of doing. Whether that is a temporary slowdown or will prove more lasting is a question that worries Washington.
Some experts say there is room for China to steer slightly more money toward Europe or Japan, and buy up more dollar-denominated stocks, rather than debt, while also pushing ahead with its own financial reforms to slow its accumulation of dollars.
Like China, Japan has several reasons to be jittery about America’s debt crisis. There are concerns in Tokyo, for example, that a possible downgrade could shake investor confidence in Japan’s own mushrooming debt, which is already twice the size of its $5 trillion economy.
“As the world’s biggest economy, the U.S. has a big and immeasurable impact on global financial markets, and Japan would not escape the damage,” Hidetoshi Kamezaki, a Bank of Japan board member, said this week, urging American officials to strike a deal on the matter.
Contributing reporting were David Barboza from Shanghai, Hiroko Tabuchi from Tokyo, Sang-Hun Choe from Seoul, Jack Ewing from Frankfurt and Stephen Castle from London.
Article source: http://feeds.nytimes.com/click.phdo?i=758f888981538c11f4722a92fb6dd506
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