MAD support for bonds even as fingers point at Russia

Wed Mar 19, 2014 2:54am EDT
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By Mike Dolan

LONDON (Reuters) - As Russia appeared to dump U.S. Treasury debt this month in the thick of a tense East-West standoff over Crimea, bond markets barely blinked - raising questions about just how brewing crises across the developing world may feed back on Western economies.

Once labeled "Mutually Assured Financial Destruction", the stockpiling of U.S. and European currency and bonds by emerging market central banks over the past decade has arguably been as stabilizing a force as the Cold War version of MAD that prevented amassed nuclear arms being fired in anger.

Any attempt to gain advantage by wielding the weapon would be pointless as it would rebound in equal measure.

Its financial iteration, according to former U.S. Treasury chief Larry Summers who coined the phrase in 2002, meant neither the United States, in need of overseas funds, nor mega reserve holders such as China, in need of liquid securities to bank their windfalls, would dare undermine each other due to the symbiotic debtor/creditor link and mutual benefits.

Today it might seem perverse for emerging nations - under stress for almost a year at least partly due to rising long-term U.S. interest rates - to actively offload U.S. Treasuries in a way that merely pushes those rates ever higher.

Yet with an estimated $3.7 trillion of the $7.7 trillion of hard cash reserves held by emerging economies banked directly in U.S. bonds, the inherent clout is indeed now nuclear.

And if financial MAD hinges on purely economic and financial expediency, then Russia's effective annexation of Crimea and military threats to Ukraine's territory may require a different calculus altogether.

What's more, the threat of retaliatory sanctions and asset freezes by Western powers on Russian entities muddies the picture even further.   Continued...

Russian roubles are seen in this photo illustration taken in Moscow, March 7, 2014. REUTERS/Sergei Karpukhin