U.S. Debt In Asia Has Its Costs
Charles V. Zehren
May 25, 2003
As British economist John Maynard Keynes observed, if you owe the
bank 100 pounds, you're the one with the problem. But if you owe a
million pounds, the bank's the one with the problem. So it goes with
Asia and the United States.
In recent decades, Asian central banks and investors have lent
trillions of U.S. dollars to the U.S. government and American
corporations to finance everything from federal deficits to mergers
and acquisitions. As a result, the Asian countries, which form the
wheelhouse of the global economic machine, now have "the
problem."
They're fed up with "dollar hegemony" or having to keep high dollar
reserves to pay their debts and protect their currencies.
Consequently, they're poised to issue "cross-border" debt
instruments in their own currencies, essentially putting the rest of the
world on notice that they no longer consider the United States as the sole safe haven for storing the
considerable fruits of their financial success.
While it may sound innocuous, the possibility of such a move represents nothing less than a "massive
hammer poised above the U.S. economy," warns Arun Motianey, the Citigroup Private Bank's director
of investment research.
An even weaker U.S. dollar, higher interest rates, and lower stock and bond prices could eventually
result, affecting Americans who pay federal taxes, buy imported goods or have their retirement
savings tied up in a 401(k).
The key player is ASEAN+3, the 36-year-old Association of Southeast Asian Nations, which
represents Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar
and Vietnam, along with the big three - Japan, China and South Korea. A critical date comes June
30 when the organization is expected to telegraph its members' intention to begin issuing
cross-border debt in the "Chiang Mai Initiative" report to the Asian Development Bank board of
governors in Manila.
It's anticipated the plan will call for Asian central bankers to reduce the dollar holdings in their
reserves and greatly increase how much they hold in each others' currencies, elevating them to
"reserve status." Once this is done, Asian debtors will find securities issued in their own currencies
more marketable with deep-pockets Asian investors and their fellow central bankers. By eschewing
the dollar and buying each others' debt in their own currencies, the Asian countries would be scaling
back on the amount of excess wealth they invest in the United States. And that wealth has been
considerable.
Japan and China pack most of ASEAN+3's international economic punch. But as a group, Motianey
estimates, the 13 countries - which export a lot and import a little - account for 95 percent of the
world's surplus "current accounts" - or the difference between imports and exports. The Asian
countries then send about four-fifths of those savings to the United States and wind up holding
about 90 percent of all the reserves in U.S. dollars worldwide.
"America's success at attracting foreign capital may be a pyrrhic victory," Motianey said. "The U.S.
may live to rue the day that it has such a huge portion of its debt held by foreigners," he said, putting
the figure at 30 to 40 percent.
Given the dominance of the dollar, the U.S. government and American corporations have been able
to count on the Asian countries paying up to buy their debt as U.S. imports rise in proportion to
exports. But ASEAN+3, favoring its debt over U.S. debt, could erode the status of the dollar as the
dominant global reserve currency. That could reduce demand for U.S. government and commercial
debt, forcing the United States to pay more to borrow money to finance growing federal deficits,
worsening the nation's fiscal situation.
As borrowing costs mount, the president and Congress would have a tougher time keeping a lid on
taxes, the Fed would face more of a challenge maintaining low interest rates, and the private sector
would see the gap widen between what it spends and what it earns.
With Asian central bankers and investors demanding fewer dollars, the value of the dollar would fall,
helping U.S. exporters, but hurting the ability of U.S. consumers to buy cheap imports. Resulting
strength in Asian capital markets could also result in what Motianey calls "collateral damage," by
stemming demand for U.S. equities and fixed income instruments by Asian investors, weakening U.S.
prices.
ASEAN+3 is no monolith. But Motianey and others say the members generally believe Asian
countries should expand their options and take steps toward limiting their dollar exposure. There's
something that can be said, too, for investing in instruments issued by culturally and economically
familiar countries instead of the United States. And for foreign investors, Sept. 11 and the war on
terror has lessened the attractiveness of this nation as a place to invest compared to other parts of
the world.
The Fed also estimates nonresidents hold about $3 trillion in U.S. credit market instruments, with most
of the dollar-related currency risk getting passed on not to the U.S. debtors, but to the Asian
creditors. "No other net- debtor economy has the luxury of doing this," Motianey said. "As a result, all
of the risk of the weak U.S. dollar hits unhedged creditors disproportionately." The members of the
ASEAN+3 are bearing the brunt of the dollar's recent fall.
But ASEAN+3's decision to rely more on their members' own currencies is not so much "us vs. them,"
as an imbalance that economic forces will correct, Motianey said. "ASEAN+3 is not looking to punish
America or clip its wings. It has a problem. And their solution is to say 'maybe we should not be
holding that much in dollars.'"
Spinning out the scenario to a logical conclusion has Motianey mulling the possibility that an Asian
monetary union could in the "medium to long term" create its own Euro-type currency, an ACU or
Asian Currency Unit.
Reducing the dollar's status as the paramount reserve currency could then eventual force the United
States into a "major debt workout," Motianey said. And one day the U.S. government may actually
find itself issuing Treasury bonds not in dollars, but in Asian currencies, like the yen.
"Either way, near or long term, there's likely to be restraints on the dollar's appeal and attractiveness,
and that could eventually mean that U.S. entities will have to curb their appetite for living beyond their
means," Motianey said. "It will no longer be so easy to borrow from the future." |
