Must read article on Asia and the future of the dollar.
U.S. Debt In Asia Has Its Costs
Charles V. Zehren
May 25, 2003
As British economist John Maynard Keynes observed, if you owe the bank 100 pounds, you're the one with the problem.
But if you owe a million pounds, the bank's the one with the problem. So it goes with Asia and the United States.
In recent decades, Asian central banks and investors have lent trillions of U.S. dollars to the U.S. government and
American corporations to finance everything from federal deficits to mergers and acquisitions. As a result, the Asian
countries, which form the wheelhouse of the global economic machine, now have "the problem."
They're fed up with "dollar hegemony" or having to keep high dollar reserves to pay their debts and protect their currencies. Consequently, they're
poised to issue "cross-border" debt instruments in their own currencies, essentially putting the rest of the world on notice that they no longer consider
the United States as the sole safe haven for storing the considerable fruits of their financial success.
While it may sound innocuous, the possibility of such a move represents nothing less than a "massive hammer poised above the U.S. economy,"
warns Arun Motianey, the Citigroup Private Bank's director of investment research.
An even weaker U.S. dollar, higher interest rates, and lower stock and bond prices could eventually result, affecting Americans who pay federal taxes,
buy imported goods or have their retirement savings tied up in a 401(k).
The key player is ASEAN+3, the 36-year-old Association of Southeast Asian Nations, which represents Indonesia, Malaysia, Philippines, Singapore,
Thailand, Brunei, Cambodia, Laos, Myanmar and Vietnam, along with the big three - Japan, China and South Korea. A critical date comes June 30
when the organization is expected to telegraph its members' intention to begin issuing cross-border debt in the "Chiang Mai Initiative" report to the
Asian Development Bank board of governors in Manila.
It's anticipated the plan will call for Asian central bankers to reduce the dollar holdings in their reserves and greatly increase how much they hold in
each others' currencies, elevating them to "reserve status." Once this is done, Asian debtors will find securities issued in their own currencies more
marketable with deep-pockets Asian investors and their fellow central bankers. By eschewing the dollar and buying each others' debt in their own
currencies, the Asian countries would be scaling back on the amount of excess wealth they invest in the United States. And that wealth has been
considerable.
Japan and China pack most of ASEAN+3's international economic punch. But as a group, Motianey estimates, the 13 countries - which export a lot
and import a little - account for 95 percent of the world's surplus "current accounts" - or the difference between imports and exports. The Asian
countries then send about four-fifths of those savings to the United States and wind up holding about 90 percent of all the reserves in U.S. dollars
worldwide.
"America's success at attracting foreign capital may be a pyrrhic victory," Motianey said. "The U.S. may live to rue the day that it has such a huge
portion of its debt held by foreigners," he said, putting the figure at 30 to 40 percent.
Given the dominance of the dollar, the U.S. government and American corporations have been able to count on the Asian countries paying up to buy
their debt as U.S. imports rise in proportion to exports. But ASEAN+3, favoring its debt over U.S. debt, could erode the status of the dollar as the
dominant global reserve currency. That could reduce demand for U.S. government and commercial debt, forcing the United States to pay more to
borrow money to finance growing federal deficits, worsening the nation's fiscal situation.
As borrowing costs mount, the president and Congress would have a tougher time keeping a lid on taxes, the Fed would face more of a challenge
maintaining low interest rates, and the private sector would see the gap widen between what it spends and what it earns.
With Asian central bankers and investors demanding fewer dollars, the value of the dollar would fall, helping U.S. exporters, but hurting the ability of
U.S. consumers to buy cheap imports. Resulting strength in Asian capital markets could also result in what Motianey calls "collateral damage," by
stemming demand for U.S. equities and fixed income instruments by Asian investors, weakening U.S. prices.
ASEAN+3 is no monolith. But Motianey and others say the members generally believe Asian countries should expand their options and take steps
toward limiting their dollar exposure. There's something that can be said, too, for investing in instruments issued by culturally and economically
familiar countries instead of the United States. And for foreign investors, Sept. 11 and the war on terror has lessened the attractiveness of this nation
as a place to invest compared to other parts of the world.
The Fed also estimates nonresidents hold about $3 trillion in U.S. credit market instruments, with most of the dollar-related currency risk getting
passed on not to the U.S. debtors, but to the Asian creditors. "No other net- debtor economy has the luxury of doing this," Motianey said. "As a
result, all of the risk of the weak U.S. dollar hits unhedged creditors disproportionately." The members of the ASEAN+3 are bearing the brunt of the
dollar's recent fall.
But ASEAN+3's decision to rely more on their members' own currencies is not so much "us vs. them," as an imbalance that economic forces will
correct, Motianey said. "ASEAN+3 is not looking to punish America or clip its wings. It has a problem. And their solution is to say 'maybe we
should not be holding that much in dollars.'"
Spinning out the scenario to a logical conclusion has Motianey mulling the possibility that an Asian monetary union could in the "medium to long
term" create its own Euro-type currency, an ACU or Asian Currency Unit.
Reducing the dollar's status as the paramount reserve currency could then eventual force the United States into a "major debt workout," Motianey
said. And one day the U.S. government may actually find itself issuing Treasury bonds not in dollars, but in Asian currencies, like the yen.
"Either way, near or long term, there's likely to be restraints on the dollar's appeal and attractiveness, and that could eventually mean that U.S. entities
will have to curb their appetite for living beyond their means," Motianey said. "It will no longer be so easy to borrow from the future."
Copyright © 2003, Newsday, Inc.
