Australia has some US$12.3 at risk in US treasury holdings, split between banks, superannuation funds and the Reserve Bank.Failure to break the impasse in Washington over the debt ceiling will lead to a write down in the value of the assets and leave the Australian owners vulnerable to missed interest payments.
US president Barack Obama is due to address the nation at 11.00 this morning eastern Australian time as the clock ticks down to the August 2 deadline to reach a deal on lifting the ceiling.
Failure to lift the ceiling will shutdown government services and potentially trigger a downgrade by ratings agencies and reverberate around the world.
US Treasury figures show the three biggest holders of US government debt are China with US$1.159 trillion, Japan with US$912.4 billion and the United Kingdom with US$346.5 billion.
Australia is the 34th biggest creditor on the US table complied in May... It has been rapidly winding down its holdings of US government debt from a peak of US$19.2 billion in June 2010.
Ahead of a critical week Treasurer Wayne Swan warned of the need for “very tough decisions” in the US and said while a new agreement by European leaders on sovereign debt was “an important step,” many countries were still facing a long and painful adjustment.
Australia’s share market is expected to open lower this morning after hefty losses on Wall Street Friday night.
The Dow Jones Industrial Average shed 96.87 points, or 0.8 per cent, to 12,143.24 points, while the broader S&P 500 Index lost 8.4 points, or 0.6 per cent, to 1292.28 points.
Australian shares capped their worst monthly performance in more than a year on Friday amid the fear of a US default.
HSBC chief economist Paul Bloxham said a possible downgrade of the United States’ prized AAA credit rating was ‘‘haunting’’ equity markets and would continue to spook investors for the next few weeks.
A downgrade could trigger a mass reshuffle of world funds and offloading of US assets.
‘‘A lot of fund managers, pension funds and hedge funds have mandates to have a certain amount of AAA rated securities in their portfolios. Probably all of them have US securities,’’ he said.
‘‘There would be a lot of reshuffling and heavy selling that could see bond yields increase. It’s not a comfortable situation to be in.’’
Westpac’s global head of fixed income strategy, Russell Jones, said whether US assets were dumped would depend on the legal obligation of AAA mandated investment managers to sell.
‘‘Thankfully it would appear that relatively few are legally obligated to do so,’’ he said.
‘‘On the other hand, to maintain the average ratings of their portfolios... they may have to liquidate holdings of lower quality assets, say junk bonds, and this could cause these markets to seize up.’’
Chad Padowitz, chief investment officer of Melbourne-based fund manager Wingate Asset Management said a credit downgrade would not be a ‘‘disaster scenario’’.
‘‘People would see through that. The US is still a better credit risk than many others,’’ he said.
‘‘At the end of the day, the US can print its way out of any debt problem because it issues debt in its own currency.’’
But boosting liquidity risked depressing the US dollar to a point where inflation exploded — a situation Mr Padowitz said America was nowhere near.
‘‘All their quantitative easing, the printing of money that they have done has been held on bank balance sheets, it’s not going into the economy. When that turns, when that creation of new dollars goes through the credit system and people stop deleveraging, that’s when you’ll have an inflation problem.’’
Published in today's SMH and Age
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