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US, China & Russia May Hold Talks on Restructuring US's Massive Debt Under Trump

Russia, China and other emerging market economies have intensified the sale of holdings in US government bonds. Russian financial experts suggest that if the selloff continues, and President-elect Trump moves forward on his spending promises, Washington, Beijing and Moscow may end up holding talks with creditors on restructuring US debt.

The latest figures made available by the US Treasury Department on foreign holdings of US government debt show that even as total investment into US treasury bills has grown, the stakes of China and Russia have dropped off significantly, from $1,258 billion to $1,157 and $89.1 to $76.5 billion, respectively.

The drop, consisting nearly $100 billion (or 9.1%) of China's total holdings, and $12.6 billion, (or 14%) of Russia's, saw Russia drop one spot from the 18th to the 17th largest holder of US debt. China remains the number one foreign stakeholder, but pulled out over $28 billion just between August and September.

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Financial experts have long held that US Treasuries are a highly dependable investment, one which has never faced the prospect of defaulting, making them a good purchase during times of market volatility.

Speaking to Russia's Expert magazine, Broker Credit Service Ultima director Vitaly Bagamanov explained that there are no indications at the moment that Washington is not in a condition to pay on its obligations, particularly given the fact that the US itself is the issuer of the dollars used for settlements.

Alternatives, Bagamanov noted, include European bonds, but that market is limited, making the US debt market the most attractive even for those countries with strained relations with Washington.

At the same time, President-elect Donald Trump's promises to invest in US infrastructure and to stimulate job creation may spur inflation, forcing the Federal Reserve to raise interest rates. This, according to Bagamanov, could lead to a new influx of foreign investment in the US debt market in search of a better yield, and to an outflow of funds from emerging markets.

Andrei Dirgin, director of research at the Russian brokerage firm Alfa Forex, disagrees, pointing out that investors aren't biting even as the yield on 10-year Treasury bills has risen to 2.3% after the election, compared with a 1.8% rate before it. Investors, including state investors, are actively selling off US bonds with the expectation that the new president's policy will contribute to a sharp rise in inflation, the analyst suggested.

Dirgin recalled that Trump has made promises to increase spending on infrastructure and to lower taxes, all at the expense of budgetary funds. This, he noted, would inevitably result in a growth in inflation, resulting in the Federal Reserve tightening monetary policy in 2017. That, he said, would make US Treasury bills lose some of their appeal, turning them from 'safe' to 'high risk' in the eyes of investors.

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However, Dirgin stressed that it's too early to predict a crisis, suggesting that investors should at least wait for Trump's inauguration and his first decisions as president. If he moves forward on his campaign promises and begins a large-scale economic stimulus program, Treasury yields will continue to grow, giving rise to a new scuffle in Congress over raising the debt ceiling.

Finally, Petr Pushkarev, chief analyst of the TeleTrade group of companies, which specialize in Forex trade, noted that the Federal Reserve's impending rate hike was introduced of not only for domestic economic reasons, but as a demonstration to the world that the Fed believes in the rapid growth of the US economy, thus demonstrating the reliability of Treasury bills. However, this is a bluff, Pushkarev suggested. "In this way, the Treasuries market faces the continued inflation of a bubble."

"Once the moment comes when China, Japan, Korea or some other major holder of US debt loses faith [in US Treasuries], the only way to be able to stop the process will be through negotiations," the analyst stressed. "My prediction is that during Trump's term, the US, Russia and China may call a roundtable of creditors aimed at restructuring US debt. There is no other way to resolve this issue, which has already matured, and the victims of which are everyone, including the US."

"Elites have burdened [Americans] with $20 trillion in debt, of which nearly $6.5 trillion belongs to foreign states, but the country itself factually never saw this money, never saw it being put to use for development. [Instead], the debt has been used to pay off interest on old debts, and to line the pockets of privileged banks and funds, paying them interest on US debt [accumulated in] quantitative easing programs."

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Ultimately, Pushkarev stressed that even if Trump's policy of spending on infrastructure and low taxes lead to success, this will not occur overnight, and predictions to the contrary are written by those who want to preserve the status quo.

"The future success of Trump is being predicted by the same people who only days before were saying that they don't believe in his economic program, nor in his chances for victory," the analyst noted. "And the goals of these people are the same ones they pursued as they fought for Hillary Clinton's victory: to delay as much as possible the inevitable, and to preserve the status quo for as long as possible."

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