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News Analysis


19/07/2011
SINGAPORE: For Asia, the deepening debt troubles in the West are like a giant asteroid on a collision course -- too big to dodge or ignore, and difficult to pinpoint precisely where the worst damage will be done. With roughly $3 trillion of reserves held in the form of U.S. Treasury debt -- more than $2 trillion in China and Japan alone -- Asia would be directly exposed to a U.S. debt downgrade or default. The sheer size leaves Asia with nowhere to hide. "Where could these investors go to put that amount of cash to work? Answer: Nowhere," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. Government officials interviewed by Reuters said there was little they could do but watch, wait and hope for the best as Washington struggles to find a politically palatable agreement to avoid an Aug. 2 default and satisfy ratings agencies looking for proof of longer-term debt sustainability. Indeed, some officials sounded more worried about risks emanating from Europe, where debt fears have spread beyond Greece, Ireland and Portugal to a much larger economy: Italy. "Holding onto (U.S.) Treasuries could cause some capital losses in case of a downgrade, but we could live with it," said one senior Japanese government official who requested anonymity because he was not authorised to speak to the press about contingency planning. "We have no problems investing in sub-AAA rated bonds," the Japanese official added. "Besides, what else should we buy by selling dollars? Euros? Would that be a safer investment than the dollar?" Japan's worry would be a strengthening in the yen currency versus the dollar or euro if debt troubles deteriorate, which would hurt its exporters and constrain economic growth. The biggest concern for Asia as a whole would be a global panic, similar to what followed the bankruptcy of Lehman Brothers in 2008. Asia fared better than the United States or Europe in that episode because its banks had little direct exposure and its public finances were healthy. A U.S. default would be a direct hit. Not only would Asia's Treasury holdings be at risk, a severe bout of risk aversion would probably mean investors pull money out of emerging markets, even though their growth prospects look healthier than those in many of the advanced economies. Banks that count on Treasuries for ultra-safe reserves might have to curb lending or sell riskier assets to bolster capital.

	Analysis by Mihir Sandesara, CEO of Padmam Capital Pvt. Ltd. : WHAT IS THE SIGNIFICANCE OF A GLOBAL FINANCIAL EVENT WHICH HAS ONLY OCCURRED TWICE IN LAST 90 YEARS? Yes - deadline of Aug 2, 2011 is fast approaching where US debt is reaching its debt limit for third time in 90 years to call for default… Historically, such events have been connected to fund the world wars i.e. last two occurrences were in 1945 (world war II) and 1933 (Great depression following world war I). US government bonds create contractual obligations to their lenders viz-a-viz Social security cheques create statutory obligations to their citizens. Consider timing of the fact where 77 million baby-boomers are retiring now vs. maturing US treasury debt leading to financial catastrophe. In terms of financial numbers, more than US $2 trillion US treasury is held by just two countries China and Japan which nearly controls 15% of US GDP! When times are tough, global financial advisors look for US dollar and US Treasury. But this time around, none of those will give any cushion. US treasury is expected to pay its obligations in the order they came due however among many options, this could lead to either rollover of debt or late payment of interest and neither of them are without damage nor credit worthy for world's largest economy. If you study the US debt history, the Liberty Bonds were issued in 1917 onwards with maturity payable in gold at $20.67 per ounce but were refused and US govt then devalued US dollar by 40 percent against foreign exchange in order to remain afloat. The period of 1918, 1919 and 1943 in which US debt nearly doubled compared to the previous year. 2011 US debt default issue is about (inter)national financial security for US and non achievement of agreement on raising US debt limit in congressional hearing between two parties while the fact that 2012 is a presidential year cannot be undermined. Selective international debt comparison shows that Greece, Italy, US, France, Portugal and Japan belong to the same (overly) borrowing club. 1-China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand 2-The Czech Republic, Hungary and Poland 3-Argentina, Brazil, Chile and Mexico Finally, if US debt default occurs even momentarily, it will have effect on all asset classes be it equity, gold, real estate, bonds, currency,… all over the world. Sit tight on your cash and Good Luck!
Source : Reuters, IMF, World Economic Outlook (emerging market economies); OECD, Economic Outlook (adv eco.)