The move will likely heighten calls for an alternative to the dollar as the global reserve currency of choice and spur efforts by Asian countries to diversify their reserves. An adviser to the central bank of China, the largest U.S. creditor, said the downgrade would damage the greenback.
S&P late Friday cut the U.S. government debt rating from AAA to AA+ with a negative outlook, the first time in modern history that one of the three main ratings firms has stripped the U.S. of its triple-A status. The move puts the rating of the world’s biggest economy below Liechtenstein and more than a dozen other countries, and on par with Belgium and New Zealand.
For Asian governments, the downgrade is bad news. Most countries in the region are running large trade surpluses with the U.S., resulting in a large accumulation of dollars, which they have ploughed into U.S. government and agency bonds. Any disruptions to the U.S. economy, a major market for Asian exporters, would also have serious implications for Asia.
Japan, the second largest creditor to the U.S. after China, stood by its long-time ally.
“The trust we have in U.S. Treasurys and their attractiveness as an investment will not change because of this action,” a senior Japanese government official said. Another official said Japan’s investment policy regarding its foreign reserves remains unchanged.
Xia Bin, an academic adviser to the People’s Bank of China, warned that the U.S. currency would continue to weaken. “The U.S. dollar will be in the depreciation trend in the long term,” he said.
A former PBOC official told Dow Jones that China should continue to reallocate some of its reserves, as the U.S. downgrade increases the risk of holding too many dollar assets. The comments echo sentiment expressed by many Chinese policy makers, who have for months voiced concern about Washington’s rising debt and the U.S. Federal Reserve’s super-easy monetary policy.
“We should diversify foreign-exchange reserves from the U.S. assets in the long run, though it’s not easy to operate,” said Jing Xuecheng, previously deputy head of the PBOC’s research department, now a consultant at the China Financial Institute of Peking University. He said China should look at other options, such as Europe and emerging markets.
The state-run Xinhua news agency said China, as the U.S.’s biggest foreign creditor, had “every right” to demand it to address its structural debt problems and ensure the safety of China’s dollar assets.
While chances for a full-blown U.S. default are slim, the downgrade serves as another warning about the long-term sustainability of U.S. government finances, the government mouthpiece said in a commentary piece.
It urged the international community to improve supervision over the U.S. dollar, saying the world may need “a new, stable and secured global reserve currency to avert a catastrophe caused by any single country.”
China has nearly $3.2 trillion of foreign-exchange reserves, and some estimate that as much as 70% are in dollar-denominated assets.
Analysts say Japan is unlikely to sell any of its dollar-denominated assets at a time when it is fighting to stem the yen’s rise to near a record-high against the U.S. unit. The finance ministry Thursday sold an estimated ¥4.5 trillion ($57.4 billion), double the previous one-day record, in a bid to prevent a strong yen from squelching its weak economic recovery.
The yen sales, most likely against the dollar, will further increase Japan’s foreign reserves, which hit a record high of ¥1.151 trillion at the end of July. Of the total, ¥1.060 trillion yen was held in securities, most of which are believed to be U.S. Treasurys, finance ministry data show.
Australia Deputy Prime Minister and Treasurer Wayne Swan pointed out that the U.S. economy faced a difficult period ahead.
“We’ve known for some time that the United States is still facing a long and painful adjustment to get their budget back on a sustainable medium-term footing,” Mr. Swan said. But he added the deal last week by the U.S. Congress to raise the country’s debt ceiling and reduces its gaping budget deficit was “an important first step” toward fiscal sustainability.
Other officials flagged the risks of S&P’s move beyond the U.S.
The chief economic adviser to India’s finance ministry told Dow Jones that the downgrade meant a cut in the global economic outlook.
“This is a warning signal whether you are in New York, New Zealand or New Delhi,” Kaushik Basu said.
Yoon Jong-won, a senior official at South Korea’s Ministry of Strategy and Finance, said that while the downgrade isn’t good news, local authorities would first have to monitor the market impact.
“It’s not clear how much additional shock this downgrade will bring,” he said. “We’ll first have to see how the U.S. market reacts to the news in terms of how big a movement in capital occurs there and at what pace.”
A senior official at the Bank of Korea said the downgrade wasn’t likely to substantially curb appetite for U.S. Treasurys.
South Korean central bank and government officials are due to meet at 0700 GMT Sunday for a prearranged meeting on the recent deterioration in market conditions, and are now expected to discuss and look at possible responses to the S&P move.
Government of Singapore Investment Corp., a sovereign wealth fund that manages the city-state’s foreign-exchange reserves, said it is closely monitoring the situation following the S&P news.
“GIC has a long term investment outlook. We monitor closely developments that affect this outlook. This includes the credit rating of US government debt but also similar developments in some European countries,” a GIC spokeswoman said in an emailed statement to Dow Jones.
Hong Kong’s government and de facto central bank said the downgrade was “within market expectations,” but that they would closely monitor the reaction. The Hong Kong Monetary Authority noted that the move reflected “the medium- to long-term pressure faced by U.S. public finance.”
A spokesman for New Zealand’s finance minister said the move highlighted international uncertainty.
“The downgrade “shows we continue to live in an unusually risky and uncertain global environment,” the spokesman told Dow Jones. He added the government has been working to “diversify” its trade toward newer markets in Asia so New Zealand is less dependent on “troubled regions.” WSJ