Losing faith: Global financiers look to de-Americanize

RT A US debt default could hit on Thursday, and world leaders are second guessing the dominant role America plays in finance. Regardless of the final decision in Washington, confidence and credibility in the US has already eroded. RT This week, the US may be forced to default on its $16.8 trillion debt if a deal to raise the ceiling is not struck. And some US legislators are acting “irrationally” enough to indeed allow it to happen, Professor Jeffrey Sommers told RT. Published time: October 14, 2013 11:44 Get short URL Mark Wilson/Getty Images/AFP Share on tumblrTags Crisis, Currencies, Economy, USA A US debt default could hit on Thursday, and world leaders are second guessing the dominant role America plays in finance. Regardless of the final decision in Washington, confidence and credibility in the US has already eroded. In an editorial published by the Chinese state-owned press agency Xinhua, a columnist says the US economy has ‘failed’ and put many countries who hold state assets in dollars, at risk. “To that end, several corner stones should be laid to underpin a de-Americanized world,” the editorial read. Last week China, the biggest US creditor, started to make preparations for a technical default on loans. The European Central Bank and the People’s Bank of China (PBC) have agreed to start supplying each other with their currencies, avoiding the dollar as an intermediary currency. The currency swap agreement will last for three years and provide a maximum of 350 billion Yuan ($56 billion) to the ECB and 45 billion euro ($60.8 billion) to the PBC. In a further sign of growing distrust, China introduced a so-called “haircut”, or a discount, on the value of US Treasuries held as collateral against futures trades. Developing and developed nations are equally concerned, and institutions like the World Bank and the International Monetary Fund (IMF) have issued several warnings. Christine LaGarde, managing director of the IMF told the US they must uphold their financial promises to the international community and raise their debt ceiling. Failing to do so would put the world “at risk of tipping yet again into a recession,” LaGarde said in an interview on NBC’s ‘Meet the Press’, which aired on October 13. “You have to honor your signature, … give certainty to the rest of the world,” LaGarde urged the US, a strong supporter of the international lending tool. The country that has long provided a sturdy backbone to the global economy is now teetering on a mass default. If US lawmakers don’t forge a solution to raising the debt ceiling by October 17, investors with US treasury bonds, one of the lowest-risk assets, could suffer. “It’s not just China that’s at the mercy of US lawmakers, its everybody in the world that is at the mercy of US lawmakers right now,” David Kuo, Investment Advisor, Motley Fool told RT . “China is trying to diversify away from US Treasuries,” said Kuo, adding investors “cannot just assume an asset is 100 percent safe.” China holds nearly $1.3 trillion in Treasuries, Japan has $1.14 trillion, and other big foreign creditors include Caribbean creditors, Brazil, Taiwan, Russia, and European nations. Other creditors have decided to keep calm. Russia, ranked the 11th on the list of the US top creditors with the estimated $132 billion in US Treasuries, plans to keep their Treasuries. "I don't see the need for revising our reserve investment strategy in US Treasuries," Russian Finance Minister Anton Siluanov said at a press conference on October 11 following a meeting of the G20 finance and Central Bank chiefs. “What’s happening now, I hope, is a fairly short-term situation,” Siluanov told reporters, noting Russia’s investment plan is long-term. If the US misses the debt ceiling deadline of October 17 and stops paying their creditors, it would be the first major Western government to do so since Nazi Germany under Hitler in 1933, which wasn’t able to pay their debts following World War I. The US has a bank holiday today in honor of Columbus Day; however, after making little headway on solving the budget gap, both the Senate and the House will hold sessions on Monday. For Republicans, Obamacare has been a major stumbling block in agreeing to raise the debt ceiling, as they see the legislation as antithetical to their ‘small government’ philosophy. ================ U.S. Senate leaders are “making progress” in their bid to resolve Washington’s latest fiscal crisis but still seek agreement on two key points - length of an increase in the debt limit and a funding bill to reopen the government, a Democratic aide with knowledge of the talks said on Oct. 14. The Treasury says it cannot guarantee that the U.S. government will be able to pay its bills past Oct. 17 if Congress does not raise the $16.7 trillion debt ceiling by then. It would bring global trouble “in a way you couldn’t possibly understand,” says Jamie Dimon. Debt ceiling holdouts in D.C. suggest otherwise. But they’re wrong. Financial markets are a confidence game, and there’s solid recent evidence of what happens when confidence collapses. It would bring global trouble “in a way you couldn’t possibly understand,” says Jamie Dimon. Debt ceiling holdouts in D.C. suggest otherwise. But they’re wrong. Financial markets are a confidence game, and there’s solid recent evidence of what happens when confidence collapses. A U.S. debt default would “ripple through the global economy in a way you couldn’t possibly understand,” says Jamie Dimon, chief executive of JPMorgan. Lawmakers in Washington resisting an increase in the federal borrowing limit suggest otherwise. But they’re wrong. The Treasury has said it will start running short of cash on Thursday if frantic efforts by the White House and Congress don’t resolve the political impasse soon. That doesn’t mean it will stop servicing America’s $16.7 trillion of debt immediately. But that’s not really the point. The market reaction will come whenever investors switch from incredulity ((the state or quality of being incredulous; disbelief)) to believing American leaders might actually allow that to happen. Immediate consequences will probably echo the situation when the Reserve Primary money market fund broke the buck in 2008, marking its net asset value down from the traditionally unquestioned $1 a unit after being stuck holding Lehman Brothers debt. Broader short-term funding markets worth trillions of dollars, which rely on Treasury bills as a kind of currency, will start seizing up as cautious participants worry they aren’t worth their face value – the article of faith that keeps these markets liquid. In the highly interconnected world of finance, that will spark fears about financial institutions’ liquidity, further freezing funding markets and bringing crippling margin calls, which is what occurred after Lehman’s collapse five years ago. Meanwhile, instead of a downward spiral centered on dodgy bonds in one segment of the mortgage market, investors everywhere will be forced to assume all U.S. government debt obligations are in question. They will sell off dollar assets and seek relatively safe alternatives like yen, Swiss franc and euro-denominated paper. Text - Members of Congress might react to the first signs of meltdown. After all, lawmakers passed the Troubled Asset Relief Program bank bailout in October 2008 after first rejecting it and seeing stocks decline by 7 percent in an instant. But by then, borrowing costs will be higher across the board and they may not fully settle back. Higher debt costs could dent the fragile improvement in the housing market and slow economic recovery in general. Text - Lawmakers may reach a last-minute deal, and anyway what would follow a default isn’t exactly predictable. But events wouldn’t be as hard to understand as Dimon suggests. He could easily have explained: financial markets are a confidence game, and there’s solid recent evidence of what happens when that confidence collapses. Text - Lawmakers may reach a last-minute deal, and anyway what would follow a default isn’t exactly predictable. But events wouldn’t be as hard to understand as Dimon suggests. He could easily have explained: financial markets are a confidence game, and there’s solid recent evidence of what happens when that confidence collapses. ================ Asian shares head to 5-mth highs on hopes for U.S. deal Tue, Oct 15 03:06 AM EDT 1 of 9 By Lisa Twaronite and Dominic Lau TOKYO (Reuters) - Asian shares rose to their highest in nearly five months on Tuesday on heightened hopes for a deal in Washington to reopen the U.S. government and avert a possible debt default, though investors remained wary with the deadline just days away. European shares were expected to follow suit, with financial spreadbetters predicting Britain's FTSE 100, Germany's DAX and France's CAC 40 would all open up around 0.5 percent. "The sudden the u-turn in sentiment has seen the bears blindsided," Capital Spreads trader Jonathan Sudaria wrote in a note to clients. While investors expect U.S. politicians will reach a deal before Thursday's deadline to raise the U.S. debt ceiling to allow the country to meet its obligations, avoidance of a worst-case scenario of a default is far from assured. There were positive signals from negotiations between Democrat and Republican Senate leaders, but any deal would still need approval in the House of Representatives, where it is unlikely to sail past conservative Republicans. MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.9 percent to its highest since May 23. Several markets in the region were closed for holidays, including Singapore and Indonesia. Japan's Nikkei share average rose 0.3 percent to its highest close in two weeks, but ended off session highs as traders waited to see if U.S. politicians could strike a deal. "The market is still precarious," said Takuya Takahashi, an analyst at Daiwa Securities. "Even if default can be avoided, investors are not ready to take risk at this point." Citigroup Inc and State Street Corp have been exploring ways in which they might impose limits on the use of short-term treasury bills due in the coming weeks as collateral, the Wall Street Journal reported, citing people familiar with the matter. Against a basket of major currencies, the dollar was up slightly, moving away from an eight-month low hit after the U.S. government shutdown started earlier this month. The dollar bought 98.41 yen, slightly down on the day but recovering from a low of 98.05 hit on Monday. It also drifted lower to buy $1.3569 against the euro. The fiscal plan being discussed by U.S. senators would raise the $16.7 trillion debt ceiling by enough to cover the country's borrowing needs at least until mid-February, according to a source familiar with the negotiations. It would also fund government operations until the middle of January, though some fear that would just set the stage for another standoff then. "U.S. policymakers are just kicking the can and we will have another showdown in January. Under such circumstances, it would be difficult for the Fed to reduce its stimulus," said Masafumi Yamamoto, forex strategist at Praevidentia Strategy. U.S. S&P 500 E-mini futures were slightly higher on Tuesday, indicating a firmer open if the gains were to be maintained. U.S. Treasury futures slipped 11 ticks. In the commodity markets, gold slipped about 0.2 percent to $1,269.70 an ounce. U.S. crude slipped 0.3 percent to $102.10 a barrel, giving up some of Monday's gains as traders bought contracts to cover short positions ahead of a possible deal in Washington. (This story has been fixed to remove reference to India in list of markets closed for holidays) (Additional reporting by Ayai Tomisawa and Hideyuki Sano in Tokyo; Editing by John Mair) =================