Sapa-AFP and Bloomberg Washington and Beijing
Beijing urged Washington yesterday to protect the interests of investors after ratings agency Moody’s Investors Service placed the US triple-A debt rating on a downgrade watch.
“We hope the US government adopts responsible policy and measures to ensure the interests of investors,” Chinese foreign ministry spokesman Hong Lei told reporters.
His comments came after Moody’s raised the pressure on US legislators to increase the government’s $14.3 trillion (R97.8 trillion) debt limit by placing the nation’s credit rating under review for a downgrade late on Wednesday.
The US, rated Aaa since 1917, was put on review for the first time since 1995 on concern that the debt threshold would not be raised in time to prevent a missed interest or principal payment on outstanding bonds and notes, even though the risk remained low, Moody’s said.
The rating may be reduced to the Aa range, and there is no assurance that Moody’s would restore its top rating.
China is by far the top owner of US debt, with holdings at $1.153 trillion in April, according to US data, and the Asian nation has raised concerns about its investment in the past.
Beijing had been cutting its holdings of US treasuries for five consecutive months until March. The figure only increased slightly in April, US data showed.
Yesterday, Chinese credit ratings agency Dagong said it had also put US sovereign debt on negative watch for a possible downgrade.
Meanwhile, former US Federal Reserve chairman Paul Volcker said yesterday that he expected legislators to reach a deal on the country’s debt ceiling and avoid a default.
Asked at a conference in London yesterday if a “little default is healthy”, he said: “I’m not ready to accept that experiment at the moment. I think calmer heads will prevail,” he said, referring to the negotiations.
President Barack Obama may summon congressional leaders to a summit this weekend after the latest round of White House negotiations on the deficit ended on a tense note and the Moody’s warning.
Two Democratic officials said Obama had told the legislators that they had until today to decide whether they could reach a deal to cut the deficit or settle for a way to raise the debt ceiling before US borrowing authority expires on August 2.
The increasing tension between Democrats and Republicans was underscored by duelling accounts of a White House meeting that ended sourly. House majority leader Eric Cantor said Obama had “got very agitated” and left the room after Cantor suggested a vote on a smaller deal. “Don’t call my bluff; I am going to the American people,” Obama said, according to the Republican.
While Democratic officials disputed that characterisation of Obama’s demeanour, the White House conceded it might have to accept a smaller accord as Republican opposition to tax increases hardens and both sides acknowledge a government default could send the US economy into a tailspin.
Federal Reserve chairman Ben Bernanke told the House financial services committee that failure to raise the debt limit would lead to a “huge financial calamity” that could add to unemployment.
Unless the debt ceiling was raised, he said, the economy could be in greater peril than when Lehman Brothers went bankrupt in September 2008.
The 10-year treasury yield rose 2 basis points to 2.90 percent at 6.37am in New York yesterday. The price of the 3.125 percent security declined $1.56 per $1 000 face amount.