Subprime fallout may sour foreigners on U.S. debt

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - Burned by fallout from the troubled U.S. mortgage market, foreign investors may be less willing to cheaply finance towering American debt, forcing up borrowing costs and threatening U.S. economic growth.

European investors in particular have been feasting on U.S. corporate debt issues, and the strong demand has helped to keep the cost of credit low. Some analysts worry that investors, suddenly risk-averse after the subprime mortgage mess shone a spotlight on lax lending practices, will demand fatter returns.

"We have to wonder whether foreigners will retrench from U.S. corporate debt, which has been financing more than half of the U.S. trade deficit," strategists from Societe Generale wrote in a note to clients.

The U.S. trade deficit for the first half of 2007 stood at $391.3 billion, after a record $818.1 billion last year.

To cover the deficit, the U.S. economy needs to attract more than $2 billion a day in investment, which has not been a problem to date as countries with big trade surpluses, such as the oil exporters and China, stock up on U.S. securities.

That has enabled U.S. consumers to keep spending freely, but concerns are growing that the gravy train may soon slow.

Fred Bergsten, director of the Peterson Institute for International Economics in Washington, said that even before the subprime mortgage problems, there were signs that global appetite for U.S. investment was waning as growth accelerated in other regions such as Europe, and key creditors diversified their holdings away from the U.S. dollar.

"The real issue is, What is the impact of all this ... on U.S. monetary policy and the U.S. economy?" he said.