As predicted and mulled over by many, Standard and Poor downgraded the United State’s AAA credit rating to a AA+ in response to debt and deficit distress.
Just a few hours thereafter, China, the largest foreign holder of American debt, expressed its dissatisfaction with Washington, calling for a new stable global reserve currency and issuing a recommendation for the U.S. to “cure its addiction to debt” and “live within its means.”
“The U.S. government has to come to terms with the painful fact that the good ole’ days when it could just borrow its way out of messes of its own making are finally gone,” China’s state-run Xinhua News Agency said in Beijing’s first official response.
Trade and current account surpluses have led China to accumulate immense foreign exchange reserves, which have been invested in United States Treasury bonds. This is largely due to the long-held belief that the American market is the safest and most liquid bond market in the world.
Now, the nation carries more American debt than any other, and China is left with few options other than to continue purchasing United States Treasury bonds. Theoretically, analysts claim that China could buy European and/or Japanese bonds, however, neither of the markets are sizeable enough to absorb the foreign exchange reserves China has swiftly accrued.
Experts add that if China were to back off from buying Treasuries, the dollar would weaken and America’s borrowing costs would spike; however, such action would have a negative impact on China’s existing holdings, and therefore disadvantageous to all parties involved.
Still, government leaders continue to lose confidence and Chinese officials are reasonably apprehensive that their substantial holdings, worth at least $1.1 trillion, are being devalued.
According to Xinhua, “China… has every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets. International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.”
According to a European diplomatic source, the credit rating downgrade has added a new layer to the global debt issue, increasing the urgency for international coordination.
While Washington wrangles over its own debt and deficit difficulties and the EU struggles with similar dramas, China sits on the world’s largest foreign exchange holdings and its economy grows at close to 9 percent.
The eastern nation’s critical commentary serves to warn the United States of its slipping global standing.
Beijing’s reaction to the downgrade was the least forgiving among foreign leaders.
Conversely, the Dow Jones reported that Japan, the second leading creditor to the U.S. voiced support for their longstanding ally.
One senior Japanese government official stated that the United States’ “attractiveness as an investment will not change because of this action.”
Throughout the summer, the Japanese have expressed their concern over Washington’s debt debacle and the associated global economic effect.
Because the nation is trade-driven, they are more tempted than ever to hold Treasuries as a way to weaken their currency and make exporting more competitive. As a result, Japan initiated what economists estimated to be a 4.5 trillion yen intervention to purchase dollars and sell yen.
Furthermore, France’s Baroin said that his nation has faith that the United States has the ability to bail itself out of the current catastrophe.
Returning to a more negative tone, the chief economic adviser to India’s finance ministry said the downgrade will have negative implications for the global economy at large.
In cutting its rating of long-term U.S. government debt to AA+, S&P pointed to the political gridlock in Washington surrounding the deficit troubles as reason for the downgrade and decreased confidence in the government’s ability to oversee its own finances.
The U.S. had held its AAA rating since 1941.
In a statement released by spokesman Jay Carney, President Barack Obama admitted that negotiations to hike the U.S. debt ceiling “took too long” and were “at times too divisive.”
“In the long term, the health of our economy depends on [both parties working together on a larger plan]… in the short term, our urgent mission has to be getting this economy growing fast and creating jobs,” the President stated.
Economic expansion is key consider S&P warned that the nation is still not in the clear, with a potential second rating reduction in the next two years.
Further credit downgrades would likely undermine domestic and international recovery, triggering new rounds of financial turmoil.
“This is a warning signal whether you are in New York, New Zealand or New Delhi,” Kaushik Basu told Dow Jones.
Still, there are another two credit rating agencies that have yet to follow suit.
It is reported that without Moody’s and Fitch downgrade, the market impact may be less significant than anticipated.
Commercebank analysts explained that while equities may react negatively to the downgrade, a Treasury selloff is highly unlikely.
Experts and market analysts are hopeful that the downgrade will ultimately serve as a motivator, stating “the U.S. is on an unsustainable fiscal path, the way forward is clear and they hope the announcement spurs policy makers into action.”
Here’s hoping!
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