USA Reassures Foreigners it will not Default
Friday, 15 July 2011

A top U.S. Treasury official has been privately fielding questions from foreign investors about the debt limit fight in Washington and has been reassuring them that the United States will not default.

Mary Miller, assistant secretary for financial markets -- and effectively custodian of the country's public debt -- has made a key part of her job traveling overseas to meet with foreign buyers of U.S. debt.


In recent private meetings, according to a Treasury official, some have asked her to explain the political impasse in Washington over raising the $14.3 trillion borrowing cap that is threatening to plunge the United States into default if an August 2 deadline is not met.

Miller has been explaining to foreign investors the political dynamics in Washington and has been insisting that Congress will raise the debt ceiling in time. It is unknown what the investors' reaction has been to her reassurances.

Miller has also been talking to domestic investors to gather intelligence on how markets might react in the event of a default.

"She has raised the issue with us to gauge what we're hearing from our members in terms of what our investors and dealers are thinking about what impact any type of default may have," said Ken Bentsen, a senior official at the Securities Industry and Financial Markets Association.

"She has been out front to see how the markets would react if they don't raise the debt ceiling. She really wants to know what the impact will be. Our members are telling us that default is not an option," Bentsen said.

Miller is in constant touch with foreign and domestic buyers of U.S. debt, a job that will take on even more importance after a warning by the ratings agency Moody's that it might downgrade the United States' coveted Aaa credit rating if the borrowing cap is not raised.

President Barack Obama and top Democratic lawmakers are locked in tense negotiations with congressional Republicans over a deal to slash long-term budget deficits, which Republicans are demanding as a condition for their support to raise the borrowing limit.

Nearly half of U.S. debt is held by foreigners, up from just 30 per cent in 2001. China is the biggest foreign creditor, ahead of Japan.

If foreign investors start becoming nervous about buying U.S. Treasuries because of the debt limit impasse it could trigger panic in the bond markets, with a surge in interest rates that would have dire economic consequences.

So far bond markets have remained calm and foreign investors continue to buy U.S. debt. The benchmark 10-year yield remains at historic lows, but that could change rapidly if the debt talks in Washington fall apart.

POSTCARDS FROM ASIA, MIDEAST, EUROPE

China's Foreign Ministry said on Thursday it hoped the U.S. government would take a responsible attitude to guarantee investor interests in Beijing's latest expression of concern about the possibility of Washington defaulting on its debt.

Miller has met investors in a dozen countries in Asia, the Middle East and Europe since she took up her post in February 2010. It is not clear if any of those countries include China.

"In her current role, an important part of what she does is to ensure foreigners buy U.S. Treasuries," said Douglas Elliott, a former investment banker and an economics fellow at the Brookings Institution in Washington. He recently arranged for Miller to meet investors in London. The United Kingdom is the third largest foreign holder of U.S. debt. //Reuters

 

  

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