Rightways: US debt ceiling

Showing posts with label US debt ceiling. Show all posts

Saturday, 27 May 2023

The Bankrupting of America

US debt ceiling impasse and a default’s impact on Malaysia remains a concern

US debt issue may affect global demand

PETALING JAYA: With the United States currently being embroiled in a debate as to whether it should raise its debt ceiling before the June 1 deadline, concerns over the impact on Malaysia of the world’s largest economy defaulting on its borrowings were understandably raised among certain quarters.

This is all the more relevant when one considers the fact that the United States is Malaysia’s third-largest trading partner, with World’s Top Exports reporting that Singapore, China, the United States, Japan and Hong Kong contributing to more than half of Malaysia’s export revenue – 51.8% to be exact – in 2022.

The website also revealed that the United States accounted for US$38bil (RM173.5bil) or 10.8% of Malaysia’s export income in 2021, again behind only Singapore at 15% and China 13.6%.

Thus, it is not difficult to understand the oft-used adage, “When the US sneezes, the world catches a cold”, including of course, Malaysia.

Chief economist for HSBC Global Research Frederic Neumann had remarked on Monday that should the debt ceiling issue be drawn out of proportion, it could lead to a depression of US growth, and adversely impact Malaysian exports stateside, possibly even reducing global demand because of an increase in financial uncertainty.

The current debt ceiling is known to be at US$31.4 trillion (RM143.4 trillion), and reports from yesterday indicated that a resolution could be imminent.

Shedding more light on the matter, Centre for Market Education chief executive Dr Carmelo Ferlito said the debt ceiling can be raised again, but only if it can be voted through the House of Representatives, which has a Republican majority.

“The Republicans are trying to use the deadline to pressure President Joe Biden to agree to spending cuts.

“On April 26, the House approved a bill to raise the debt limit by US$1.5 trillion (RM6.85 trillion), but only on the condition that spending would be cut to 2022 levels and then capped at 1% growth per year,” he told StarBiz.

A simple analogy to illustrate the ceiling standoff is the case of a parent providing a teenage child with a credit card.

If the teenager exceeds the spending limit, and asks the parent for an extension of credit, it is only natural for the parent to go over the spending habits of the child before deciding to provide more credit, which has to be repaid.

If the ceiling is not raised and the US officially defaults, Ferlito said the consequences for other economies – including Malaysia – should be looked at more in the light of a general financial turmoil that the default could cause rather than the more immediate link with American bonds that firms or governments may have.

“We do not see direct repercussions on Malaysia; rather, we foresee indirect effects in case of (a US) default, coming from a global financial turmoil,

He explained: “We do not see direct repercussions on Malaysia; rather, we foresee indirect effects in case of (a US) default, coming from a global financial turmoil.

“If there is a default, which is doubtful, there will be a financial shock and the entity of such a shock will determine how much it would impact Malaysia.”

He elaborated that a potential default and its effect on an exporting country like Malaysia can be seen as two separate phenomena, a sovereign debt default; and the business relationship between private entities.

Ferlito added: “Even if the US defaults, private companies can still transact independently from the scale of the mutual business relationship. What we have to fear more are the indirect consequences.”

Economists at Coface Services South Asia-Pacific Pte Ltd, Bernard Aw and Eve Barre, believe a breach in the debt ceiling would result in outlay cuts currently funded with borrowing while the US dollar would weaken, elevating yields.

“Such a default would also have an impact on global financial markets, which rely on the dollar as the world’s primary reserve currency and as a safe asset.

“For Asian exporters, a weakening of the dollar against their currencies would dampen their competitiveness, including for Malaysia as the United States represents its third-largest export market up to 2022,” they told StarBiz.

Although acknowledging that a negative impact on the US economy from reducing public spending would depend on the extent of those cuts, they pointed out that if an agreement leads to deep spending decreases, economic growth for the United States could be slower than the already sluggish 1.2% that Coface is forecasting for 2023.

Aw and Barre opined: “This would have a direct impact on Malaysia by reducing US demand for Malaysian goods but also on foreign investment.

“In 2021, the United States was the first source of foreign direct investment flows to Malaysia, accounting for roughly a third of the total.”

On the flipside, they projected that sharp cuts in US public spending are unlikely to be approved by the Senate, as it is controlled by the Democrats.

Meanwhile, approaching the problem from an investment perspective, chief investment officer for Tradeview Capital, Nixon Wong, echoed the economic view that a US default would have global ripple effects, including on the FBM KLCI.

“A default on US federal debt would disrupt imports of electronics and manufactured goods from Chinese factories to the United States, resulting in slower growth of orders in the entire supply chain that includes Malaysia.

“Reduced spending in the United States would lead to slower aggregate demand and import growth globally,” he said.

The effect could likely be seen on export-oriented companies on the local bourse, he said, including manufacturers of electrical and electronic and rubber products, as well as in the producers of metal, optical and scientific equipment.

He added that although Malaysia’s trade volume with the United States may be smaller compared to China, the repercussions from reduced US spending would still impact Malaysia’s exports, whether directly or indirectly.

History has shown that American political leaders have always managed to raise the debt limit before it becomes a crisis, and it is likely that this pattern will continue, Wong said.

“While there are debates and partisan divisions in Congress, it is expected that Republicans will seek spending cuts before supporting the raising of the debt ceiling.

“After all, the main agenda is to prevent a catastrophic event or severe fallout in the United States and global financial markets,” he observed.

By KEITH HIEW

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US urged against passing risks to world amid growing chance of a US default

A Chinese official on Tuesday warned of the significant spillover effect of US domestic policies and urged Washington to avoid passing on domestic risks to the rest of the world just to protect its own interests. The comment came after US leaders failed to reach a deal on the debt ceiling issue, with the deadline to avert the first-ever default approaching rapidly.

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Thursday, 11 May 2023

Will US debt ceiling deadlock push capital to yuan market?

Illustration: Carlos Latuff

Expert: The role of the U.S. dollar declines

The US Government is BROKE | The 2023 Debt Ceiling

Every few years, there is a bipartisan political farce over the debt ceiling negotiations in the US. It may look like a routine political drama, but quantitative change can lead to a qualitative difference, especially at a time when a global de-dollarization trend is gaining momentum, that is to say, the US trick of raising the debt limit to mitigate its default risk may now be very close to pushing the US treasuries to a dangerous tipping point.

The de-dollarization caused by the US debt crisis and the abuse of the dollar hegemony created unprecedented opportunities for the yuan internationalization, with more and more countries expressing willingness to settle trade in the yuan, but China must proceed with caution.

With the US on track to default without a debt ceiling increase, US President Joe Biden's talks with House of Representatives Speaker Kevin McCarthy on Tuesday failed to make any meaningful progress, with political divides remaining between the two parties, Reuters reported. Biden even told the media that he has been looking at the 14th Amendment as a way to unilaterally work around the debt ceiling, though it will not be a viable short-term solution.

The political stalemate over raising the debt limit has already led to US Treasury Secretary Janet Yellen warning of an "economic catastrophe" if the US fails to meet all government payment obligations, which could happen "potentially as early as June 1."

So far, most people still believe that the two parties will eventually reach a deal to avoid an ugly sovereign default before the deadline, just like what happened every time in the past debt ceiling struggles.

But unlike in the past, a new question has been raised in the market, that is, are the US treasuries still highly liquid? The US dollar's credit is the cornerstone of US treasuries. Because the dollar is an international settlement currency and US treasuries have stable yields and are highly liquid, countries are willing to hold US debt, making the US the world's largest debtor.

Yet, things may be different now with countries accelerating their de-dollarization efforts. The past year saw growing number of countries and regions such as India, Brazil, and the EU trying to establish new settlement systems for their trade.

Under the influence of the de-dollarization wave, some countries have reduced their holdings of US treasuries. Japan, the world's largest holder of US debts, slashed its holdings by $224.5 billion and China by $173.2 billion in 2022.

Moreover, the US' unlimited expansion of the size of its debt has also upset the market with the risks in the US treasuries. According to Yellen's testimony in a congressional hearing in March, gross federal debt would swell to $51 trillion after a decade. The scale and speed of the debt expansion means the US is getting increasingly closer to a real explosion of a debt crisis.

Also, the root cause of the US banking crisis this year is the holding of a large number of US treasuries assets, which shrank significantly in value as interest rates continued to climb. That could be a warning to various governments and precipitated them to speed up the pace of de-dollarization. Since the collapse of the Silicon Valley Bank, international investors stepped up sell-off of treasuries, and prices of all kinds of safe-haven assets like gold have surged.

Of course, de-dollarization is likely to be a long-term process, but once it started, the US treasuries could lose its aura quickly, especially as the US government repeatedly raises debt ceiling or faces risk of default. In other words, as the world realizes that the US cannot and does not have the willingness to control or reduce the size of its debt, the credibility of the US debt as a safe-haven asset is collapsing rapidly.

It should be noted that amid the de-dollarization trend, the yuan internationalization has made a series of positive new developments and breakthroughs. The yuan's international status as a trading currency has been significantly improved recently.

To ensure future development of the yuan internationalization, China needs to ensure liquidity and maintain exchange rate stability. Thus, China's financial markets as well as the yuan's onshore and offshore markets need more preparation to adapt to the new needs.