Fitch downgrading US puts Asiaâs $3.2 trillion at risk
It’s a story of two devaluations, and the response in international markets couldn’t be more dissimilar.
All hell broke loose in international markets in August 2011 when S & amp, P Global Ratings stripped Washington of its AAA status. Fitch Ratings & nbsp’s downgrading of the US in August 2023 was met with a much calmer response.
However, Fitch’s decision and the logic behind it are a much bigger problem for Asia than the lack of retaliation in the bond and stock industry suggests.
For starters, it serves as a reminder that confidence in the cornerstone of the global financial system is waning. Another possibility is that, as Washington fiddles, this place will soon be consumed by more than US$ 3.2 trillion in state wealth.
The US Treasury securities held by major Asian authorities are the subject of this allusion, which is enormous. The interactions surrounding these traditional ends are very different here as well.
The conventional wisdom twelve years before was that Eastern central bankers had the purchase. The concept was that Washington could make history’s most impressive margin call if they took its best bankers for granted. It is evident this week that Asia is essentially trapped by its peaks of money.
This explains why neither China, the second-largest country with$ 860 million in debt, nor Japan, which holds the largest US Treasuries with a$ 1.1 trillion balance, have dumped significant amounts of dollar-denominated loan. The same is true for South Korea($ 106 billion ), Taiwan($ 235 billion ); India($ 232 billion; Hong Kong ($ 277 ); Singapore($ 188 billion ).
The global financial system would collapse at the slightest hint that Washington’s Eastern bankers are bailing on the US Treasury business.
Not that Eastern officials aren’t being tempted by the US to do just that. Fitch cited turbulent politics as much as America’s financial flight toward the$ 33 trillion national debt amount in its justification for downgrading Washington. The ratings firm claimed that Republicans were tampering with the loan roof.
Despite the June bipartisan agreement to suspend the debt limit until January 2025, Fitch believes that standards of governance, including on & nbsp, fiscal, and debt matters, have steadily declined over the past 20 years.
Due to a” high and growing” government debt burden, Fitch emphasized” expected financial decay.” However, it also stated that a significant factor was the mob at the US Capitol on January 6, 2021.
We’ve seen a very steady decline in governance over the past couple of years, according to Richard Francis, co-head of Fitch’s Americas republic ratings division, who spoke with CNBC. A few crucial components may be highlighted. January 6 would be one.
At Oanda, strategist Edward Moya asserts that the schedule” certainly caught all off guard.”
So far, serene has prevailed.
Global markets are currently handling the Fitch downgrade much better than they did S & amp, P’s in 2011.
According to researcher Tan Kai Xian at Gavekal Dragonomics, investors should accept the drop in pace because Uncle Sam can easily meet his near-term payments. However, as US fiscal deficits increase to 6 % of Economy during a growth phase, focus should still be paid to debt sustainability.
Tan continues by citing three factors that indicate the US Treasury market is responding with a” everyday sigh.”
Even after a debt-limit agreement between Congress and US President Joe Biden was reached in June, One, & nbsp, Fitch, and the US kept the country on” negative watch” in May.
Second, violent business repricing wasn’t required because investors already knew the causes of the downgrade.
Additionally, it is unlikely that the upgrade will have an impact on how US Treasuries are used as a base advantage.
After all, Tan contends,” US Treasuries continue to be the Federal Reserve’s preferred form of collateral for its borrowing services.” Tan claims that because the parliamentary agreement suspends the US’s borrowing restriction until January 2025, it can easily make payments for the following 17 months.
The real question right now is whether the US Treasury’s planned large-scale debt issue can be absorbed by international markets without experiencing a sharp increase in yields, which would also mean that funding costs for Washington would increase.
In its so-called weekly refunding auctions next week, the Treasury announced earlier this week that new debt issuance would increase to$ 103 billion, substantially more than most dealers anticipated.
In the midst of discussion about the direction US yields are taking, strategist & nbsp, Benjamin Jeffery & ndrp at BMO Capital Markets, says,” The question from here is whether investors will be willing to buy the dip” or” if the selloff has room to extend.”
On the plus side, the group led by Fed chair Jerome Powell is no longer predicting a downturn. Bank of America dropped its forecast for the a & nbsp, or recession this year, this week, making it the first major bank to do so.
In a word, BofA economists stated that” new incoming data has forced us to reevaluate our earlier belief that the US economy is most likely to experience mild recession in 2024.” The poverty rate has remained close to all-time highs, economic activity growth over the past three rooms has averaged 2.3 %, and income and price pressures are moving in the right direction, albeit slowly.
The largest US secret payment provider, ADP, announced on Wednesday that 324, 000 new jobs had been added by private employers in July, much exceeding the 175, 000 that some economists had anticipated.
According to ADP analyst Nela Richardson, the business is performing better than anticipated and household spending is still supported by a strong labor market. Without widespread job losses, give growth is still slowing down.
As a result, some well-known economics concurred with US Treasury Secretary Janet Yellen that the rationale behind the Fitch drop is” obsolete.” The choice was described as” ridiculous and incompetent” by former Treasury Secretary Larry Summers. The chief financial advisor to Allianz, Mohamed El-Erian, was” baffled” by Fitch’s timing and justifications.
More to follow?
However, if you look at it more broadly, Fitch’s upgrade is the edge of the proverbial iceberg when it comes to the US.
According to Lawrence Gillum, chief fixed-income strategist for LPL Financial, continued fiscal expansion / deficits could lead to additional downgrades from rating agencies. Therefore, there will probably be more downgrades until the US government’s financial house is in order.
The last thing Washington’s major Asian financiers want to think about is that scenario. The ability of American consumers to power in Asia’s export-driven economies may be severely hampered by rising US borrowing costs. And the state’s prosperity, in the billions, is at stake.
It’s a situation that Chinese officials have flagged in the past, more so than Wen Jiabao, who served as leading from 2003 to 2013.
Wen urged Washington to maintain its AAA standing in 2009, in the wake of the consequences from the 2008 collapse of Lehman Brothers. He & nbsp said,” We have made a huge amount of loans to the United States.” ” Of course, we are worried about our assets’ security. To become completely fair, I’m a little concerned.
Washington, Wen & nbsp, and others emphasized that the country must” honor its words, remain a credible nation and guarantee the safety of Chinese assets.”
Cui Tiankai, China’s adviser to the US at the time, hinted that Beijing may one day walk to reduce Treasuries assets amid worries about costs almost a century afterwards, in 2018. He stated,” We are considering all choices.”
Fan Gang, a prominent advisor to China’s northern bank, also discussed diversifying away from the money in 2018. Fan remarked,” We are a low-income land, but we are high-wealth country.” ” We ought to & nbsp, make better use of money.” It is preferable to invest in some authentic goods more than US government debt.
De-dollarization
The Fitch report showed why efforts to remove the money from its rod are being made more aggressively. A free alliance of countries is working to find a new supply money, including China, Russia, Brazil, Saudi Arabia, the United Arab Emirates, and people.
For instance, Brazil began trading in various currencies like the Chinese yuan and the Russian ruble this time. President of Brazil, Luiz Inacio Lula da Silva & nbsp, pledged his support in April for the development of a BRICS & dbSP, or monetary unit, to be used by members of South Africa, China, Russia, and Brazil.
Why can’t a bank, BRICS & nbsp, or an institution have access to A & NBSP, currency, and NBPSP to finance trade relations between Brazil and China as well as with all the other BRIC nations? Lula enquired. After the end of golden parity, who made the decision that the money was the trade, currency, and nbsp?
Or, as Lula’s finance minister Fernando Haddad puts it,” The advantage is to avoid the shackles imposed by having business operations settled in the forex andnbsp of a country non-participant to the deal.”
In Beijing, Xi Jinping finds Lula’s support to be music to his ear. The Chinese president is rapidly increasing efforts to strengthen the Global South‘s position in political decision-making. During his second term in office, Xi is putting developing nations in the areas from Latin America to Africa to Asia to Oceania at the top of the list for becoming a more powerful economic and diplomatic power.
Anwar Ibrahim, the prime minister of Malaysia, stated this year that China is willing to talk about creating an Asian Monetary Fund, a shift that would lessen the impact of that organization in the area.
This would bring back a long-forgotten idea that most splendidly surfaced during the Asian financial crisis in the late 1990s. Asian leaders suggested a loan portfolio at the IMF’s annual conference in September 1997, which was held in Hong Kong. IMF and US Treasury leaders were the ones who came up with this idea. Anwar served as Malaysia’s fund minister and deputy prime minister at the time.
However, as China’s money becomes more and more important in international business and finance, there is a drive for an Asian monetary fund. & nbsp,
The globalization of Yuan coincides with a rush of new international trade agreements that exclude the money, including Beijing and Moscow dealing in yuan and rubles, China and Brazil agreeing to negotiate trade in the currency and reais, India and Malaysia increasing use of the rupee andnbsp in diplomatic trade.
The 10 associate Association of Southeast Asian Nations is working together to increase local trade and investment in nearby assets rather than cash. The largest economy in ASEAN, Indonesia, collaborated with South Korea to increase pound deals and prevailed.
Pakistan wants to start using renminbi to pay Russia for fuel imports. The United Arab Emirates and India are discussing expanding their non-oil industry in pounds. Lately, Argentina increased its currency-swapping relationship with China by about$ 10 billion. It is a reference to the burgeoning anti-dollar activity in South America.
In addition to Washington’s fiscal outlook, Biden made the decision to” politicize” the money to condemn Russia over Ukraine, which further damaged investors’ confidence in the US dollar.
According to Frank Giustra, co-chairman of the International Crisis Group, de-dollarization will continue despite America’s good opposition because the majority of non-Western nations want a trading method that does not expose them to nbsp, money weaponization, or hegemony. ” The question is no longer if, but when.”
In addition to the 3.2 trillion reasons already given to Asia, Fitch’s upgrade is yet another cause for concern for the money.
