Thursday, October 17, 2013

US debt timebomb defused - for now. But US reputation tarnished as China eyes opportunity.

The political brinkmanship in Washington might be over, but it seems the reputation of the United States as a global economic power has been damaged.

US Treasury bills, regarded as the world's safest investment, have been hurt by the uncertainty with interest rates rising in recent days.

AUDIO: US reputation damaged by debt ceiling impasse (AM)

The director of the Institute of Global Finance at the New South Wales University, Fariborz Moshirian, believes the damage could also be exploited by China.

The world's second biggest economy has been positioning its currency as an alternative to the US dollar, which for now remains the world's reserve currency.

"I think in the medium term the damage to the US as an economy is quite severe simply because the US currency is used as a major world currency," he said.

"And now other countries, particularly China, will think that their currency could emerge over time as a competitor to the US dollar."

Dr Moshirian says the crisis has provided with an opportunity China to deepen its capital market, attract foreign investors and ensure that its banks are more competitive with those in Europe and the US.

"China's economy has not been affected," he said.

"China didn't need to rescue her banking system, and they are sitting on massive amount of foreign exchange reserves and so Chinese financial market is very strong.

"During the Great Depression the UK was the largest creditor and US basically took over that. And now in this new era we are seeing that the US becoming the largest debtor and yet China is becoming almost a larger creditor in the world."

Dr Moshirian says there is little that central banks around the world, including the Reserve Bank Australia, could do in the event of a US debt default.

"I think if the US defaults, the Fed in US becomes a weak central bank," he said.

"And unlike during the GFC when the US Fed led a massive coordination amongst other central banks to provide financial liquidity in the system, I'm afraid this time around in the wake of any default by the US, the US Fed might not be able to provide the same leadership.

"That means we might have massive liquidity crisis in the banking system as well as in non-bank corporations."

This means there could be a big change in "in international financial architecture".

"The US currency as a global currency may no longer remain as the key currency," he said.

"And also capital market in the world will become much deeper so that they don't need to rely only on the US bond market as a way of financing their activities."

Wednesday, October 16, 2013

ASX boss warns of "dramatic consequences" of US default

By Business editor Peter Ryan

The chief executive of the Australian Securities Exchange has warned of "dramatic consequences" if the United States defaults on its debt obligations.

While Elmer Funke Kupper believes President Obama will strike a last minute deal with US republicans, he says the deadlock over raising America's US$16.7 debt ceiling has already damaged America's international standing.

Mr Funke Kupper has echoed predictions from other heavyweight investors that the US Congress understands the potentially catastrophic consequences of a US debt default.

"The ongoing assumption must be that it won't happen. I would still be hopeful that the US parties would know that would have very dramatic consequences for the world economy," Mr Funke Kupper told the ABC's AM program.

"I think it's fair to say that even if it's just theatre the US will have done damage to its international standing irrespective because we cannot have the number one economy in the world going through this every year."

As the debt ceiling impasse remains unresolved, Wall Street investors have started to factor in the likelihood of steep losses if the deadline passes without a deal.

The Dow Jones Industrial Average ended 0.87 percent or 133 points weaker after the Democrat Senator Diane Feinstein said talks had broken down.

In a sign of growing risk, yields on 10-year Treasury notes added four basis points to 2.72 percent after touching a three- week high.

Mr Funke Kupper says the perceived safety of US Treasury bills is coming under renewed pressure because of the deadlock and signals that a US default is looming without a deal.

"In the definition of what's safe, US Treasuries are considered safe and have been for the last 50 years," Mr Funke Kupper said.

"So if that gets shaken other things might get shaken too and I think that would be damaging not just for the US but for the world economy."

"I think all investors would like stability and certainty in the long run and I think in the western world we continue to stumble from minor crisis to minor crisis."

China holds approximately US$1.5 trillion of US debt with around US$5.7 trillion of Treasury notes held offshore around the world.

"They fund the United States so one of the consequences of this going wrong is that it will become more expensive to fund the United States and that will only make the problem worse.

"This is why it is so unimaginable that they (the US Congress) would allow this to go so wrong."

The Australian sharemarket is set to open weaker in the wake of the Wall Street falls.

The Australian dollar has backed away from yesterday's four month high after the Reserve Bank signalled that interest could remain on hold for the rest of the year.

But as hopes for a debt deal fade the local currency is lower at 95.1 US cents.