Big creditors China, Japan press U.S. to resolve debt fight

BEIJING/TOKYO Tue Oct 8, 2013 12:52pm EDT

Japan's Finance Minister Taro Aso speaks during a semi-annual parliament hearing on monetary policy at the Lower House of the parliament in Tokyo June 19, 2013. REUTERS/Issei Kato

Japan's Finance Minister Taro Aso speaks during a semi-annual parliament hearing on monetary policy at the Lower House of the parliament in Tokyo June 19, 2013.

Credit: Reuters/Issei Kato

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BEIJING/TOKYO (Reuters) - Japan's finance minister pressed the United States on Tuesday to resolve its political deadlock over government finances quickly to avoid a fiscal crisis that could damage the global economy.

The comment from Taro Aso was the latest sign that Japan and China - the biggest foreign creditors of the United States - are increasingly worried that the U.S. government shutdown and the standoff over the debt ceiling could wreak havoc on their trillions of dollars of investments in U.S. Treasury bonds.

"The U.S. must avoid a situation where it cannot pay (for its debt) and its triple-A ranking plunges all of a sudden," Aso told reporters following a cabinet meeting.

"The U.S. must be fully aware that if that happens, the U.S. would fall into fiscal crisis," he said.

Japan's Nikkei financial daily, citing unidentified sources, reported that Japanese officials held several emergency telephone conferences with U.S. Treasury officials on Monday.

However, a senior Japanese government official shrugged off the report, suggesting instead that the subject had been discussed only as part of regular contact between the two countries. Similarly, a U.S. Treasury official said the Treasury had no knowledge of emergency calls.

On Monday, Chinese Vice Finance Minister Zhu Guangyao said Beijing had been in touch with Washington over the standoff, in which Republicans in the House of Representatives have refused to increase the $16.7 trillion debt ceiling as they seek changes in President Barack Obama's signature healthcare law.

The U.S. Treasury has said it would hit the debt ceiling by October 17, at which time it would have only around $30 billion and incoming revenues to pay the government's bills, leaving the nation on the edge of default unless Congress raises the cap.

The political standoff is in its second week, with much of the U.S. federal government closed and no signs of a breakthrough, although some glimmers of hope emerged on Monday as Obama said he would accept a short-term increase in the nation's borrowing authority to avoid a default.

TRILLIONS AT STAKE

As of July 31, China held $1.28 trillion in U.S. Treasury bonds and Japan held $1.14 trillion, Treasury Department data shows.

The last big confrontation over the debt ceiling, in August 2011, ended with an 11th-hour agreement under pressure from shaken markets and warnings of an economic catastrophe if a default were allowed to happen.

China is "naturally concerned about developments in the U.S. fiscal cliff," Zhu told reporters, saying it was Washington's "responsibility" to avoid a debt crisis and ensure the safety of Chinese investments.

But IMF Chief Economist Olivier Blanchard told reporters in Washington that a U.S. debt default, while affecting China's portfolio of bonds, would not have any major implications for the Chinese economy. He spoke about China while presenting the IMF's latest snapshot of the global economy. <ID:L1N0HY0SD>

Japan has previously expressed its concerns in diplomatic terms. Aso and Chief Cabinet Secretary Yoshihide Suga both said last week that the fiscal standoff was essentially a U.S. domestic problem.

But Aso added that the shutdown could push up the yen against the dollar - a concern for Japan's export-reliant economy, which has benefited from a decline in the yen since Prime Minister Shinzo Abe won election in December on a reflationist policy platform.

Should the United States default on its debt, "there would be a large international impact," Aso said last week. "If there is no prompt resolution, various impacts will emerge."

The yen has been rising this month as investors shed risk and seek the perceived safe haven of the Japanese currency. The dollar slipped on Tuesday to a two-month low of 96.55 yen in Asia trade but it moved higher later in the day.

(Additional reporting by Yuko Yoshikawa, Richard Cowan, Mark Felsenthal, Aaron Sheldrick and Kiyoshi Takenaka and Anna Yukhananov in Washington; Writing by William Mallard; Editing by John Mair, Chizu Nomiyama and Dan Grebler)

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Comments (4)
QuidProQuo wrote:
Dear China and Japan:
Fear not, our promises on our interest payments will be made.
Common sense and fiscal responsbility will ensure that. But as our largest lenders, I would ask that you curb your enthusiasm for our bonds and understand that America must take some time to re-evaluate it’s need for such high levels of borrowing via general obligation bonds. You have made it too easy for the spend crazy liberals to wreack financial imbalance on our country. Not your fault you have been assured that our system of taxation and seizure guarantees your loans will be paid.
Please understand that we are in the process of re-evaluating our balance sheet while we take this break in government operations to shut down temporarily and clean house.
In the meantime, there is talk of new revenue bonds being issued via collaborative profits of America’s largest and most successful corporations. They will be called Pride bonds, and they will be structured as product bonds that encourage global consumption of goods and serices from our strong corporations. As these come to market, you may want to take a look at these instead of governemnt GO bonds.

Oct 08, 2013 10:09am EDT  --  Report as abuse
nike_sky wrote:
Big creditors China, Japan press U.S. to resolve debt row! How amusing! China actually holds $1.16 trillion (8 percent) of our debt. And Japan $912.4 billion (6.4 percent) So in total America owes all foreigners about $4.5 trillion in debt. But America owes America $9.8 trillion.

Oct 08, 2013 10:58am EDT  --  Report as abuse
brotherkenny4 wrote:
nike_sky: good point. The real major debt holder of US debt is the american people (in retirement accounts – 401Ks etc.) including myself. I, in fact, am glad that the Chinese and Japanese also hold debt, because I believe it would be much easier for our leaders to steal our retirement accounts by defaulting on the debt if it only had to be taken from the US people. However, since to do that, they would also have to sink the Chinese and Japanese economies, and in doing so destroy the world economy, there is very little likelyhood that the US will default. They may not raise the debt limit, but with prioritization, they could pay the debt interest (which prevents a default) out of revenues. So, Thank you China and Japan for believing in us, and sorry about the dumbass politicians. We’ll try to get some smarter ones in the future, I hope.

Oct 08, 2013 1:35pm EDT  --  Report as abuse
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