Recession 2011: Asia, Europe to stick it out with US debt after S&P cut

TOKYO/SINGAPORE: Asian states are likely to retain their US Treasury holdings for now and European governments expressed confidence in the world's largest economy after Standard & Poor's cut the US's sovereign credit rating to AA+.

Russia said the one-step cut "can be ignored" and France joined the U.S. in questioning S&P's reasoning. South Korea affirmed its "faith" in Treasuries after an emergency meeting of officials today in Gwacheon, south of Seoul.

China's official Xinhua news service said in a commentary that the U.S. must cure its "addiction" to borrowing. For all the angst, policy makers across Asia are lured to Treasuries as a result of efforts to stem gains in their currencies against the dollar, which would impair export competitiveness. China has accumulated $1.16 trillion of the debt and is the largest individual foreign holder. Japan's efforts to weaken the yen boost that country's demand, and Vice Finance Minister Fumihiko Igarashi said today that the government is ready to intervene again after selling the currency on Aug. 4.

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"They won't be happy about it, but Asian central banks will just have to hold on and stick it out," said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. "There is pressure on them to hold on to liquid assets and there is nothing more liquid than the Treasury market. At least Treasuries have been doing well and they aren't holding on to distressed assets."

Asia accounts for about half of foreign-owned U.S. debt, Treasury data show. Speaking on Japan's NHK television, Igarashi said the government may intervene again if its sees speculative trading. Last week, the government may have sold a record 4.5 trillion yen ($57 billion), according to Totan Research Co., a Tokyo money-market brokerage. "Our faith in U.S. Treasuries has not changed," Yim Jong Yong, South Korea's vice finance minister, told reporters today after meeting with counterparts from the central bank and financial regulators. The nation will step up monitoring of capital flows and currency movements because of the U.S. downgrade and Europe's debt crisis, he said.

Investors in Treasuries earned 3.12 percent in the three months ending July 31, based on Bank of America Merrill Lynch data. Treasuries have rallied in recent weeks even after S&P warned it might lower the rating from AAA, as investors sought a haven amid deepening concerns that the global economic rebound may fade. Yields on benchmark 10-year notes closed at 2.56 percent Aug. 5, before the S&P announcement of the cut to AA+, down from 3.12 percent a month ago.

Japan, the second-largest international investor in American government debt, sees no problem with trust in the securities, a Japanese government official said on condition of anonymity. 

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