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Till debt does US apart

The debt debacle in Washington is causing jitters in power corridors from Beijing to Brussels. The stewards of the world's largest economies are anxious for a compromise in the US, to keep their own finances from suffering collateral damage.

world Updated: Jul 30, 2011 23:23 IST

The debt debacle in Washington is causing jitters in power corridors from Beijing to Brussels. The stewards of the world's largest economies are anxious for a compromise in the US, to keep their own finances from suffering collateral damage.

Their worries stem from an inescapable reality: for other governments, there is still no good alternative to holding the almighty dollar, or American Treasury bonds, even if the US gets tarnished by a once-unthinkable credit downgrade.

China: China has the most to lose because it holds the largest amount of US Treasury bonds - at least $1.16 trillion. Beijing issued a blistering attack on Friday, calling for a show of responsibility and an end to the partisan bickering in Washington.

"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," said state-run news agency, Xinhua, in a Friday oped, referring to the standoff between Democrats and Republicans.

Xinhua said the "irresponsible" brinksmanship in Washington risked "strangling the still fragile economic recovery of…the world as a whole."

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, and there are still few alternatives to US Treasury bonds. There are limits to cutting back because other large bond markets, in Europe and Japan, are not nearly as liquid.

Europe: Officials in Europe archly recalled that US leaders had admonished them just a few weeks ago to straighten out the messy politics of the euro-debt crisis.

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. Stricken countries like Ireland and even healthy ones like Germany cannot afford the trade impact of a stronger euro.

Worse, the Washington debt standoff has already made borrowing more expensive for big countries with high debt, Italy and Spain, fanning fires that could imperil the euro zone.

The world: 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 US to default on its debt, governments elsewhere are girding for the repercussions of the likely tarnishing of America's sparkling credit rating.

A falling dollar is among the worries for Japan, the second biggest US creditor, whose post-tsunami economic problems would only worsen if the yen rises further against the dollar.

Tokyo is also concerned that a possible downgrade could shake investor confidence in Japan's own mushrooming debt, already twice the size of its $5 trillion economy.

There is already evidence that China and other countries are slightly reducing their purchases of long-term US debt. Whether that is a temporary slowdown or will prove more lasting is a question that worries Washington.

Businesses are bracing for a rough ride. Friedrich Eichiner, chief financial officer of BMW, said, "The governments of this world, especially in the West, are not prepared for a second financial crisis."