Finance chiefs from nations holding more than $1.3 trillion of Treasuries signaled no plans to sell even as the U.S. faced condemnation for the fiscal fight plaguing the world's largest economy.
Policy makers from Japan, India, Russia and Saudi Arabia expressed faith in the ability of the U.S. to pay its bills as the potential for default dominated the annual meetings of the International Monetary Fund and World Bank, which ended yesterday in Washington.
“There's no other way than for the U.S. government itself and the U.S. Congress to sort it out,” Japanese Finance Minister Taro Aso told Bloomberg Television's Sara Eisen. Fahad Almubarak, chief of Saudi Arabia's central bank, told reporters that “the U.S. current crisis will go away and we think its effect won't be lasting on our investments.”
The combination of criticism and confidence was echoed by Pacific Investment Management Co.'s Chief Executive Officer Mohamed El-Erian, who said the manager of the world's biggest bond fund is still holding short-term Treasuries in anticipation of lawmakers increasing the $16.7 trillion U.S. debt ceiling.
“When push comes to shove there will be an agreement,” El-Erian told a financial industry conference during the IMF meeting. A default would “trigger failures” in collateral markets and “be a big blow to the economy,” he said.
Rates on Treasury bills maturing through the end of the year rose last week as lawmakers sought a short-term compromise. Rates on bills due on Nov. 29 climbed 12 basis points, or 0.12 percentage point, to 0.16% last week, according to Bloomberg Bond Trader prices. Yields on benchmark Treasury 10- year notes gained four basis points on the week to 2.69%.
While Treasuries aren't trading today due to the Columbus Day holiday, futures rose after Senate leaders yesterday held their first negotiating session since the government shutdown began Oct. 1. Ten-year U.S. Treasury future contracts for December delivery rose 5/32 to 126 8/32, based on electronic trading at the Chicago Board of Trade.
Treasury Secretary Jacob J. Lew used the presence of foreign counterparts to highlight the risks of inaction, saying the U.S. is the “anchor of the international financial system” and its assets enjoy a haven status.
“The United States cannot take this hard-earned reputation for granted,” he told the IMF's steering committee.
That reputation may be intact. While Treasuries have become “mildly less attractive,” Reserve Bank of India Governor Raghuram Rajan said “we are not selling our U.S. assets, we are holding on to them.” Almubarak of Saudi Arabia, the world's largest oil exporter, said “we are long-term investors” and “our long-term view is positive.”
“Our investment in U.S. Treasuries is a long-term investment so I don't think there's any major need for major revisions to how our reserves are invested,” Russian Finance Minister Anton Siluanov told reporters. “What's happening today, I hope, is a fairly short-term situation.”
As of the end of July, Japan held $1.14 trillion of Treasuries, second only to China's $1.28 trillion, according to U.S. Treasury Department data. Russia had $132 billion and India $59 billion.
Attention shifted to Senate leaders yesterday to find a deal that averts a default and restores full government operations. Earlier, Senate Democrats rejected a proposal from Senator Susan Collins, a Maine Republican, saying the debt-limit increase in her plan, to January, was too short to provide certainty, and the funding extension at Republican-preferred levels, until March, was too long.
With the government now partly closed for almost two weeks and an Oct. 17 deadline looming for a boost to its borrowing authority, the U.S. found itself in the rare position of being blasted for its economic policy making by foreign officials more used to being the subject of its ire.
“There is a chance future historians will see today's crisis as the turning point when American democracy was shown to be dysfunctional,” Former Treasury Secretary Lawrence Summers said in an op-ed in the Financial Times Monday. The U.S. risks becoming “an example to be avoided rather than emulated.”
“In Europe we are very concerned,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said in a Bloomberg TV interview. “There's no schadenfreude.”
Just two years ago, then-U.S. Treasury Secretary Timothy F. Geithner used the gathering of global policy makers to warn Europe that failure to resolve its debt crisis risked “'cascading default, bank runs and catastrophic risk.” Japan has often been lectured for not beating deflation and China for the value of the yuan.
The fear, expressed by officials and bankers from around the world, is that failure by U.S. politicians to end their logjam would roil financial markets and cause recession. That concern was reflected in a call by the Group of 20 leading industrial and emerging economies for the U.S. to take “urgent action to address short-term fiscal uncertainties.”
“It's quite obvious that if this situation were to last a long time, this would be negative, very negative for the U.S. economy and the world economy,” European Central Bank President Mario Draghi said Oct. 12 in Washington.