The U.S. Will Need to Give Reassurance About Its Deficits

In November 2009, the New York Times was showing the irony in the trip American President Barack Obama made “to his Chinese banker.” Yes, but there it is… China just relinquished to Japan its place as number one creditor to the United States. It occupied this place since September 2008. According to data published on Tuesday, February 16, by the U.S. Treasury Department, Chinese lenders (outside of Hong Kong) held $755.4 billion (556 billions euros) in Treasury notes in December 2009, or 4.3 percent less than in November. Since July 2009, China has sold a total of $45.1 billion worth of U.S. bonds.

A warning to Washington, or a simple correction? Analysts are wondering. Very critical of American budget deficits, Beijing was worried these past months about the safety of Chinese investments in Treasury bonds. And, in hushed tones, it was threatening to diversify.

At a time when their disagreements with Mr. Obama, who received the Dalai Lama on Thursday, are multiplying, the Chinese authorities could be tempted to act on their threats. It’s one way to put pressure on Washington in order to be offered better yields. But the margin of maneuver is narrow. As Bruno Cavalier, chief economist of the Oddo stock exchange, reminds us: “After all, China holds mountains and mountains of U.S. debt.”

If it stops buying Treasury bonds, the value of its assets held in dollars will greatly decrease. “The two countries are in a situation of great interdependency, so it is in their mutual interest to prevent this system from exploding in flight,” Mr. Cavalier went on.

Nevertheless, the American debt is a concern, and not only for China. As Russian Prime Minister Vladimir Putin pointed out, the United States is not doing any better than Greece, which, with its public accounts adrift, has been battered by the markets. “The crisis did not start in Greece, nor in Russia nor Europe (…), but on the other side of the Atlantic,” he emphasized on Tuesday. “Over there, the problems are similar, with massive external debt and budgetary deficits.”

“Growth Rebound”

Between rescue plans for the banking sector and stimulus packages, the American public debt has deepened to surpass $12 trillion. In early February, the rating agency Moody’s sounded the alarm: The United States needs to put additional economic measures in place if it wants to keep its “AAA” rating, the best possible rating.

After hammering at Greece, will investors decide to go after the United States? “One must remain moderate when raising the difficulties of financing the American debt, but we cannot exclude an increase in the risk premium,” assessed Laurence Boone, an economist with Barclay’s. On Friday, the interest rate on 10-year U.S. Treasury notes reached 3.8 percent. “The United States is predicting a growth rebound far greater than Europe,” Ms. Boone reminds us. “This should allow it to rebalance its public finances far more rapidly.”

And, after all, since all is not going so badly on the other side of the Atlantic — the gross domestic product should increase by 2.7 percent in 2010, according to the White House — the American Federal Reserve (Fed) has started to ease up on its anti-crisis measures. On Thursday, it announced that it was raising the finance discount rate by a quarter point to 0.75 percent. A decision that “will not have a tangible impact on the economy, but sends a strong message,” assert the experts at Société Générale. In the currency exchange markets, it was received loud and clear: The greenback immediately appreciated in value and traded at $1.302 to €1.00 on Friday.