Forty percent of Japanese investors said there is a risk that the U.S. government will default on its debt, a survey published by Barclays Capital showed.
Almost 34 percent of the 66 respondents in the poll sent to Japanese institutional investors from Jan. 26 to Jan. 28 said there is a "significant" or "slight" risk that the U.S. will lose its AAA sovereign debt rating this year. Twenty-two percent said they were concerned about the credit risk of German government bonds. China surpassed Japan in September to become the biggest foreign holder of U.S. Treasuries.
I don't know how much of this is related to the $815 squintillion stimulus, or whatever it is we're proposing to spend this week. There are other reasons to worry about US debt, like the downturn, the dollar, and our entitlement problems. But when the citizens of a country with a debt-to-GDP ratio of 1 and more than a decade of economic stagnation behind them start complaining that you're not such a good credit risk, it's time to start worrying.
I think we need ScentOfViolets to show up and explain all the statistical problems with this "poll."
For my part, I'll limit myself to saying that "default" and "losing AAA rating" are not the same thing.
The answer is "an unlimited amount".
Countries that have floating fx, non-convertible currencies swap default risk for inflation risk. The US will always be able to meet all of its dollar denominated obligations. There is no guarantee what those dollars will buy though...
.34 * 66 = 22.44
could be that of those 22.44 respondents, 21 of them said "slight risk", which amounts to very little. i doubt "significant" and "slight" would be lumped together unless there were an insignificant number of "significants".
How is Japan able to borrow at such low rates when it has such high debt levels?
If you think the US will lose its AAA rating, that is the same as saying you think there is some risk the US will default, no?
Well Megan, maybe it's time to graduate from a stimulus package agnostic to a full blown skeptic. With the package being more waste than stimulus, the effectiveness of even target stimulus controverted, and the promise/threat of more spending to come, we are just at the beginning of this debt fiasco.
If foreign investment in the US collapses, we're so screwed, which is something the spending advocates should have taken into account, but didn't.
If you think the US will lose its AAA rating, that is the same as saying you think there is some risk the US will default, no?
There is some risk that a AAA-rated entity will default. What this says (at most, neglecting the problems with the survey) is that some number of people think there is a (slight) risk that the US's (also very slight) risk of default will increase.
But realistically, I don't think anybody actually rates the US's risk of default as anything other than extremely close to zero. Perhaps that will double to something which is merely extraordinarily close to zero.
What these "investors" (whoever they are) are worried about is not actual default, but a change in bond prices.
The answer is "an unlimited amount".
But even though the U.S. could always avoid default by inflating its way out of the problem, the willingness to lend depends on the belief that the currency will not be debased by inflation before it's repaid. So it seems like the practical effect of a credit downgrade would be exactly the same as an expectation of inflation risk -- namely higher borrowing costs for the U.S.
How do you short Japanese investors?
Sure there is some risk.
Just like there is a risk the sun won't rise.
There is a reason why the US is seen as a safe haven. Everyone else will fail first.
Of course, that's the conventional wisdom. So maybe those Japanese guys aren't so dumb afterall...
I have been wondering at what point the rest of the world will say enough is enough with our ponzi scheme. I can't imagine why you'd loan someone money to pay of your loan to them. It's even crazier to imagine loaning someone money to pay off only the INTEREST on your loan to them. But then again, if they don't who will buy their stuff? They need us to import what they are exporting.
Once the rest of the world is developed enough where they can shift their exports somewhere else, we may be screwed if we haven't started paying down our principle though...
My concern will be the point where they say, "Sure, we'll take as much as you sell," but our yields begin to rise for no apparent reason, and just won't stop.
Revealed preference, baby.
Rob said, "But realistically, I don't think anybody actually rates the US's risk of default as anything other than extremely close to zero. Perhaps that will double to something which is merely extraordinarily close to zero."
Actually, there is a market for Treasury CDSs that historically supports that view, but that market currently estimates the risk of default of 5- and 10-yr notes at a very non-negligible six percent.
While common sense suggests that the U.S. would sooner inflate its way out of its debt than default, there are unusual scenarios where that might be impossible. Unfortunately, not much more unusual than what we've seen in the past several months.
WHAT WHAT!?! (as diet coke sputters from my nostrils)
Japan, with a debt level of 190% of GDP vs. our 35%, is questioning our ability to pay? What is their Sovereign Debt Rating? AA vs. our AAA, and they are questioning us?
I don't the the average Japanese person is aware of how indebt they are. I had a Japanese history professor, who was from Japan, who was shocked when I showed her the numbers. She hadn't even heard that Japan's sovereign debt had been downgraded.
that market currently estimates the risk of default of 5- and 10-yr notes at a very non-negligible six percent.
That is a vastly more interesting factoid than what a non-random sample of unidentified Japanese people think.
Although I'll admit I don't have a ton of faith in financial market pricing just at the moment.
There's an old saying:
"When you owe the bank a dollar, the bank owns you. If you owe the bank a million dollars, you own the bank.
They are so very much in trouble.
They've been more than willing to sell to us and unwilling to buy from us. When they did buy American products, like airliners, they insisted on coproduction and other technology transfers. (I wonder if McDonnell Douglas' tie cutting ceremony has spread?)
They wouldn't trade their dollars for currencies they were willing to spend, because the exchange rate would have fallen. They didn't want the money to sit idle, so they invested it in the only place you can invest dollars.
As a result we've had an increasing large series of bubbles:
1) Commercial real estate in the '80s.
2) The .com bubble
3) Residential real estate
4) Oil
Have I missed any?
Now they complain because they don't like the hole they've dug for themselves. Japan's economy has been stagnant since the early '90s. Now it's China's turn.
BobW,
To be fair, when commodities world wide are priced in dollars, you need dollars to do business with people who aren't even buying goods with dollars.
So dollars are involved in a China to French transaction as well as a China to US transaction.
But there is some truth to the saying, "Our dollar, your problem."
Re: But when the citizens of a country with a debt-to-GDP ratio of 1 and more than a decade of economic stagnation behind them start complaining that you're not such a good credit risk, it's time to start worrying.
To me it sounds like these Japanese people are singularly ill-informed, since if the US is at risk of default, common sense must insist that the default warning beacon should be flashing red over Tokyo given its debt levels. Not to mention a far more serious problem with aging population. 40% sounds like a scary number-- but then recall that a similar fraction of the US population thinks the Earth is 6,000 years old.
Sam:
In November of 2006 China's dollar reserves passed the $1 Trillion mark. They have only grown since. Does China do that much dollar denominated business with third countries? I don't think so.
If Japan and China want the U.S. economy to pick up again, they need to spend dollars in the USA, buying manufactured goods and comodities.
Buy American! It's the patriotic thing to do, for everyone!
"What this says (at most, neglecting the problems with the survey) is that some number of people think there is a (slight) risk that the US's (also very slight) risk of default will increase."
Exactly, Bob Lyman is correct. Saying there is "risk the US will lose its AAA rating" is not the same as saying there is "risk of a US default." Although some of the Japanese investors who think there is a risk of the US losing its AAA rating may think there is a risk the US will default, some of those investors might just be thinking the US could lose its AAA rating but definitely will not default.
Which is all a matter of conjecture. But really, the facts are out there, so this survey is a measure of confidence more than anything.
Ness wrote:
If foreign investment in the US collapses, we're so screwed, which is something the spending advocates should have taken into account, but didn't.
Huh? "Spending advocates" know that if foreign investment in the US collapses, we are screwed. But we don't know whether it will or not. It very well may; this stimulus combined with the coming bank plan (whatever it is) may well kill the bond market and thus create a dollar crisis are foreigners try to dump dollar-denominated assets. But frankly the same could be said of any government spending. The only way to eliminate the risk of this happening is to have the government stop spending any more money and balance the budget tommorrow. But there are risks there, as well, such as never-ending debt-deflation resulting in another Depression, which in turn crushes tax revenues... and you are back are square one.
The point is, there are risks no matter what actions the government takes. For all we know, the banks (Citi, BoA, Wachovia, etc.) might have created such a massive hole in 2001-2006 that no matter what the government does we are in for a catastrophic ending. Without definitive knowledge of the future, all policymakers can do is bumble along and try to look for warning signs on all sides at once-- not easy to do.
Hate to break the government bashing, but people, 30-year Treasures are yielding 3.64%.
"If you think the US will lose its AAA rating, that is the same as saying you think there is some risk the US will default, no?
Posted by Megan McArdle | February 3, 2009 4:22 PM "
The USA may always *choose* not to meet an obligation, and the interest rate on its debt may go up, but any sovereign, so long as its debt is in its local fiat currency, *need* never default.
Japan, with a debt level of 190% of GDP vs. our 35%, is questioning our ability to pay? What is their Sovereign Debt Rating? AA vs. our AAA, and they are questioning us?
Well at the moment our budget *deficit* is running at over 10% of GDP. That makes a 10 or 30 year Treasury note a risky proposition, don't you think? Sure, we won't default next year, but the odds of us defaulting in the next, say, 10 years are looking a hell of a lot higher than they were a few years back.
"Hate to break the government bashing, but people, 30-year Treasures are yielding 3.64%."
And Japanese government 30 year bonds, according to Bloomberg, are yielding 1.92%. Why, if Japan has a lower sovereign credit rating and a much higher ratio of debt to GDP, do their treasury bonds yield less than ours?
Anyone?
Sometimes you are so much of a bomb-thrower Megan, that I'm sure how much you pause to consider.
In this case, consider the total decline in US equities of various sorts, the four trillion that some people are still missing from bank solvency, and then ask yourself if "$815 squintillion" would really be the focus of default concern.
$815 squintillion wasted does not equal default. With or without $815 squintillion, those investors are worried about "epic fail"
(if epic fail is the risk, government as X of last resort starts to look even more reasonable.)
Who remembers the 1979 movie "Americathon" with John Ritter?
The United States is broke and has to hold a telethon to pay the bills before defaulting...
Why, if Japan has a lower sovereign credit rating and a much higher ratio of debt to GDP, do their treasury bonds yield less than ours?
Maybe people have learned over the last year that rating agencies are only slightly better than astrologers when it comes to judging risk?
More usefully, rating agencies are giving a (wild, biased) guess as to the risk of formal default. Bond yields take into account a range of other factors such as
-risk of currency value falling
-risk of dodgy, non-formal defaults, that will probably take the form of currency collapse.
-risk that the rating agencies are beholden to the bond issuer in some fashion
Remember, the USA last defaulted in the late 1960s. I think it was Nixon? He stood up and said, "Hey, you know all those debts we said we were going to repay in currency convertible to gold? Well, we aren't. We will pay in little bits of paper, and run inflation at 10%+. Sucks to be you."
Who remembers the 1979 movie "Americathon" with John Ritter?
I don't remember it and I refuse to start doing so.
I don't know why people are fixating on this AAA stuff, and the opinion of a handfull of Japanees on it.
Both S&P and Moodys project that the US's credit rating will start falling in 2017 on current law, with S&P projecting the US credit rating will hit "junk" by 2027. Isn't that more impressive?
This is because CBO projects that the annual deficit then will on the way to >20% of GDP -- larger than the entire US gov't today -- by 2040 or so.
To stop that plunge in the credit rating will require offsetting the deficit increase just to 2030 with a 50% increase in income taxes as a percentage of GDP, or a 50% reduction in promised Medicare benefits, or some combination thereof, CBO says. (Sorry, only one link per comment in this system, so you'll just have to take my word on that.)
Well, 2017 is only eight years away, and 2027 only 18. And this doesn't include the whole run-up of debt and in the size of government due to the stimulus-bailout.
But I don't know who the Japanese are to talk about this. Japan's sovereign credit rating has been AA- in recent years, I think they just got upgraded to AA. They're behind the US, UK, France, Germany, etc., the rest of the first world, credit-rating wise.
But even though the U.S. could always avoid default by inflating its way out of the problem,
That's true of the currently existing debt, plus the additional debt added by the stimulus-bailout -- but that debt is much too small to present real risk of default.
Unfortunately it is not true of the implicit debt that starts crunching the nation's finances and running the deficit ever upward each year starting about 10 years from now, as reflected in the S&P, Moodys and CBO projections mentioned in my prior comment.
That is overwhelmingly the result of Social Security and other govt pensions that are indexed for inflation, and Medicare's provision of promised "real" medical services, whatever they may cost.
Thus, inflation is no way out for them. It's going to be either taxes going way up or promised benefits getting seriously cut back, or a combination of both. No other option possible.
So neither a Chicago-educated MBA nor the rest of the geniuses on this thread can explain why Japan -- with a lower sovereign debt rating and much higher debt as a percentage of GDP -- has lower 30-year bond yields than us?
Curious,
I'll give it a go, although I caution this is my intuition only. Japan runs a current-account surplus. The Japanese government borrows the money largely from Japanese savers who buy yen denominated government bonds with yen. In a deflationary environment, you would expect ultra-low yields. The US runs a current-account deficit, and our government largely borrows from foreigners whose currency is likely to appreciate against the dollar. So, even in a deflationary environment similar to that of Japan, we don't reach the same ultra-low yields on long government bonds.
Curious,
The BOJ has kept the interest rates it controls at or near 0 for many years. The BOJ has been much more aggressive in its interest rate policy than the FED has been, that is until recently.
Hence the lower rates.
"more than a decade of economic stagnation behind them" - Megan
Just wanted to note that Japan's economy grew at a healthy pace from 2005-07, and that Japan's productivity has been growing at a healthy pace even as its total GDP only grew slowly, because a lot of that "stagnation" is just demographic. Japanese women haven't been having kids for decades, so the population has been aging and leaving the workforce for 15 years, and is now actually falling.
I think this "stagnant Japan" trope ought to be retired. Japanese productivity has been growing fine. Maybe it's even a model for a world that at some point is going to need to reduce its population.
Yeah, but that's just the issuer rating. At that point, the Treasury could create a bankruptcy-remote SPV, call it US Trust 2027-1, or something like that. Sell it a class of 2028-2032 tax receivables and have it sell notes to the public. The tax receivables could fall anywhere on the risk-return curve: payroll taxes of federal government employees (if the SPV will issue notes to U.S. pension funds), or progressively more exciting assets like top bracket income taxes (for the big banks), capital gains taxes (for the hedge funds), or Democratic cabinet appointee back taxes and interest (for the sovereign wealth funds, but we'll tell thim this is a sure bet). With a nice, safe, 20% subordination, these should easily be AAA rated. If there isn't enough appetite for the mezz bonds, we can sell those to another SPV and repeat. We can distribute the overcollateralization certificates to Social Security recipients in lieu of cash, which will be a good deal for them since tax receipts always go up. The New York Fed can provide the warehouse line, and also get into a nice side business of writing credit protection on the super senior bonds. It's basically free money.
I think this "stagnant Japan" trope ought to be retired. Japanese productivity has been growing fine.
US productivity grew just fine after 1933, the Depression lasted the rest of the decade.
Psittakos,
Thanks for taking a shot at it. I don't think either of us is entirely convinced at this point. I can see how expectations of continued deflation (i.e., a strengthening yen) might compensate foreign investors, to some extent, for the low yields on Japanese bonds, but what does this do for Japanese investors who, as you say, comprise the bulk of the bond buyers?
JMO,
"Hence the lower rates."
But the BOJ doesn't set the yields on its 30-year bonds, anymore than the Fed sets the yields on ours: the market does. Why are bond buyers willing to accept such low yields on Japanese debt?
Take a look at the chart of the Top 15 foreign holders of U.S. debt, analyze their economies, and ask yourself if they have the capacity to buy any more U.S. debt.
http://www.geldpress.com/2009/02/top-15-foreign-holders-of-us-debt/
The game is over...