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[ThatHawaiiGuy]

Asian debt withdrawal threat to US deficit
By Jenny Wiggins in New York
Published: September 7 2003 19:01 / Last Updated: September 7 2003 19:01


Economists fear that Asian investors, who are the largest foreign owners of US Treasuries, may cut their holdings of US government debt, withdrawing a key source of financing for America's large current account deficit.


The worries have been fuelled by recent sharp falls in the price of US government debt.

[You know, that crash in the bond market nobody talks about. Can they raise rates? (Raising rates attracts buyers.) "They" know what will happen if they do. I would expect this would happen around the changing of the guard in 2004 when they install Kerry as president. This way the dems can take the blame for the crash...remains to be seen though, if shrub stays in power it will be interesting to see what happens to interest rates...]

Weakness in the US Treasury market could make Asian investors "less willing" buyers of debt securities, said Marcel Kasumovich, head of G10 foreign exchange strategy at Merrill Lynch.

He said there had already been a "noticeable shift" downwards in the amount of debt issued by mortgage financiers Freddie Mac and Fannie Mae being bought by foreign investors.

Asian investors have piled into the US Treasury markets in recent years, helping to push Treasury prices high and interest rates low. China, Japan, South Korea and Hong Kong owned a combined total of about $696bn in Treasuries at the end of June, up from $512bn in December 2001, according to data from the US Treasury.

[Do you think China and Hong Kong have any interest in causing us financial harm? Balance their ability to create wealth by selling us stuff with their stated desire for world dominance...what about gold?]

Asian countries use the income they receive from exporting goods to the US to buy American assets, which helps keep their currencies weak compared with the dollar. This helps keep the price of Asian goods down in the US.

But in recent months, as investors have become more optimistic about an economic recovery, they have begun to sell Treasury debt, sending government bond prices down.

Political pressure on Asian governments to alter their exchange rates could also prompt selling. The US Treasury would like Beijing to abandon its fixed currency regime because it is concerned that China is keeping its currency low to support exports.

However, if China and other Asian countries were to allow their currencies to strengthen against the US dollar, they would have less need to own US assets.

"It could mean Asia pulls out of US markets," said Ethan Harris, chief US economist at Lehman Brothers.

If Asian countries were to reduce their holdings of American assets heavily, they would remove a key source of finance for US investment spending.

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