Analysis: Default or not, Asia a hostage to U.S. debt

Mon Sep 30, 2013 1:05am EDT
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By Choonsik Yoo and Kevin Yao

SEOUL/BEIJING (Reuters) - Unless the U.S. Congress settles a political showdown to raise the country's debt ceiling in coming weeks, it will be left on the edge of an unprecedented default. But America's main creditors in Asia may be the least of its worries.

The creditors - China, Japan and other Asian governments - have a hoard of U.S. Treasuries in their $5 trillion cache of foreign exchange reserves, the equivalent of almost a third of U.S. gross domestic product.

Despite having so much at stake as bond prices lurch violently, they are not about to do anything more than minor tweaking of their portfolios.

Sovereign reserve managers and advisers cite conventional reasons for the thinking.

Asian governments consider a U.S. debt default unthinkable and see the eventual tightening of U.S. monetary policy as a bigger issue for managing their reserves. Even if the United States was to default, its debt markets would still be the safest and most liquid in the world. Importantly, they take a far longer-term view than most private investors.

"We're keeping an eye on potential market risks such as tapering, the debt ceiling and a government shutdown, but that does not necessarily mean we regard the current situation as critical," a Japanese government official, who declined to be identified in the absence of authorization to speak openly to the media, told Reuters this week.

They also face a Hobson's choice. These reserve managers would rather stay invested in Treasuries than be the cause of global market bedlam if they were to shift all that wealth.

More than 60 percent of the $5 trillion that Asian central banks hold is denominated in U.S. dollars and invested in American bonds and stocks, the International Monetary Fund estimates.   Continued...

Japanese 10,000 yen notes (L) featuring a portrait of Yukichi Fukuzawa, the founding father of modern Japan, $100 notes, featuring an image of Benjamin Franklin, and Chinese 100 yuan notes, featuring an image of former Chinese leader Mao Zedong, at the main office of the Korea Exchange Bank are seen in this picture illustration taken in Seoul October 22, 2010. REUTERS/Truth Leem