Tokyo - Some of the United States' biggest creditors moved
to shore up confidence in its sovereign debt on Tuesday after Standard &
Poor's threatened to cut its credit rating on the world's top economy, touching
a nerve among big holders of Treasuries.
Asian nations have amassed trillions of dollars in US government bonds through
recycled export earnings, and have a vital interest in maintaining their value.
So it was no surprise that officials were keen to play down the danger.
"The United States is tackling fiscal issues in various ways, so I still
think US Treasuries are basically an attractive product for us," Japanese
Finance Minister Yoshihiko Noda told reporters after a cabinet meeting.
Treasury prices did indeed prove resilient on Tuesday, though that did not stop
stocks markets from skidding across Asia, where investors were already worried
that Greece may be on the verge of restructuring its debt.
S&P, which assigns ratings to guide investors on the risks involved in
buying debt instruments, slapped a negative outlook on the United States'
top-notch AAA credit rating on Monday and said there was at least a
one-in-three chance that it could eventually cut it unless politicians found a
way to slash the yawning budget deficit within two years.
The warning sparked a general pullback from riskier assets such as equities and
If investors start demanding higher returns for holding riskier US debt, the
rise in bond yields could erode the value of Treasuries held in currency
reserves and push borrowing costs up, putting the global economic recovery in
Japan's reserves stood at $1.12 trillion at the end of March, the bulk of which
is thought to be in Treasuries.
Even that pile is dwarfed by China's $3 trillion in reserves, and again much of
that is believed to be in US government debt.
China's foreign exchange regulator and other policy advisors had no
immediate comment after the S&P move.
Other large holders of US debt include the United Kingdom, oil exporting
nations in the Middle East, Brazil, Hong Kong, Russia, Taiwan and Canada.
So monstrous have China's holdings become that it is stoking inflation in the
country while making it almost a captive investor in Treasuries, the only
market large and liquid enough to absorb such mountains of cash.
Li Jie, the head of the China Foreign Exchange Reserve Research Centre, an
academic institute with the Central University of Finance and Economics in
Beijing, said S&P's warning would ring alarm bells for Beijing.
The scale of the potential losses from a slide in the value of US debt would
drive China to cut the share of Treasuries in its holdings, he said.
"It's widely believed that US treasuries make up about 70% in China's
foreign exchange reserves, but China may cut the proportion to 50% or less in
the coming decade," Li said.
Achieving such a shift without spooking the market and driving down Treasury prices
would be no small feat, however.
The danger of a US downgrade could also draw unwanted attention to Japan's huge
debt burden, which is likely to grow larger as the government secures funding
to rebuild after last month's devastating earthquake and tsunami.
Japan is set to compile an extra budget worth about 4 trillion yen ($48.4
billion) to start reconstruction after the March 11 earthquake and tsunami,
which also triggered the world's worst nuclear crisis in a quarter century.
This is likely to be the first of several spending packages.
Japan's public debt is already twice the size of its $5 trillion economy, and
policymakers have said new bond issuance would be needed after the first extra
budget to pay for reconstruction costs.
S&P cut Japan's sovereign rating to AA-minus in January, although it said
shortly after the March disaster that it did not expect to change its ratings
stance on Japan.
Japan's third-largest private life insurer, Meiji Yasuda Life also expressed
confidence in US Treasures and said it had no plan to change its stance after
the S&P outlook downgrade.
It added it planned to increase its holdings of yen bonds and foreign bonds,
with a focus on dollar bonds.
"US President (Barack) Obama is saying he is serious about fiscal reform.
US Treasuries are the world's largest bond market and our confidence is
unshaken," Yasuharu Takamatsu, Meiji Yasuda's director of investments,
told a news conference.
"How we will invest depends on yield levels and, more importantly,
currency levels. But we won't change our initial investment plan," he
The market seemingly most threatened by a downgrade - Treasuries - was among
the least alarmed.
Yields on 10-year notes were steady at around 3.38%, not far from a near
four-week low of 3.36% hit on Monday before the S&P news broke.
The sanguine reaction underlines just how long-simmering this problem has been.
"Investors won't be shocked if the rating is lowered to just double
A," said a fund manager at a US asset management firm. "In fact, I
would wonder why Treasuries are still rated triple A."
Some investors even hoped that S&P's threat may put pressure on the White
House and the US Congress to reach a compromise on measures on deficit
reduction, as a failure to clinch a deal could lead to a government shutdown as
the US is expected to hit the current debt ceiling by May 16.
The White House last week announced plans to cut $4 trillion from the deficit
over the next 12 years, mostly through spending cuts and tax hikes on the rich.
Congressional Republicans want deeper spending cuts and no tax increases.
"The gap between the two sides seems immense but this warning of a rating
downgrade might help them reach an agreement," said Arihiro Nagata,
manager of foreign bond trading at Sumitomo Mitsui Banking Corp.
That was a sentiment echoed by a source familiar with managing South Korea's
foreign exchange reserves, which currently top $291bn.
"I think this is a good development in a sense that this will eventually
help spur efforts in the United States to improve its fiscal health," said
In India, sources with direct knowledge of the matter said the central bank was
not considering diversifying due to a lack of credible alternatives to US debt.
The Reserve Bank of India keeps more than 60% of its offshore holdings in US
Treasuries and around 30% in euros.
"After S&P's threat of downgrade, the US debt has in fact rallied.
Global markets are thinking of buying back US debt now," one of the
central bank sources said.
"Where is the alternative to diversify? European and Japanese debt are