1:13 AM
TOKYO |
TOKYO (Reuters) - Japanese cabinet ministers moved to shore up confidence in U.S. debt on Tuesday after Standard & Poor's threatened to lower its credit rating on the world's largest economy, touching a nerve with one of the largest holders of Treasuries.
Asian nations have amassed trillions of dollars in U.S. debt through recycled export earnings, and have a vital interest in maintaining its 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 U.S. Treasuries are basically an attractive product for us," 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 the Asian region.
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 came as markets were fretting over the risk of Greece having to restructure its debt and sparked a general pullback from equities and commodities.
If investors start demanding higher returns for holding riskier U.S. debt, the rise in bond yields could erode the value of Treasuries held in currency reserves and push borrowing costs up in other countries.
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 U.S. government debt. China's foreign exchange regulator and other policy advisors had no immediate comment after the S&P move.
MONSTROUS
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 Center, 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 U.S. debt would drive China to cut the share of Treasuries in its holdings, he said.
"It's widely believed that U.S. treasuries make up about 70 percent in China's foreign exchange reserves, but China may cut the proportion to 50 percent 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.
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