Asian governments reacted cautiously to Standard & Poor's decision to strip the U.S. of its top credit rating, while the region's investors braced for an uncertain new world that questions whether U.S. Treasury debt is still among the safest investments in the world.
Officials in Japan, Australia, South Korea and elsewhere said they expected the move won't curb appetite for U.S. government debt, a mainstay of global markets. But an adviser to the central bank of China, the largest U.S. creditor, said the downgrade would damage the U.S. dollar in currency markets, while others said the move marked a warning to global growth as a whole.
"This is a warning signal whether you are in New York, New Zealand or New Delhi," said Kaushik Basu, chief economic adviser to India's finance ministry.
Meanwhile, the eyes of the investment world will be on the opening of trading Monday in Asia, which will offer the first major indication of how the market will absorb the downgrade. For investors, the move could ultimately boost the attractiveness of Asian assets relative to Western ones, though the immediate fallout could well be a flight from risk that sends stock markets plunging and bond yields rising around the globe. In particular, emerging markets could face greater scrutiny from institutions and investors with a renewed awareness of danger.
The U.S. downgrade "is going to be a seismic event," said Ed Rogers, chief executive officer of Rogers Investment Advisors, the Japan advisory firm of New York-based investment firm Wolver Hill Asset Management.
For Asian governments, the downgrade is bad news. Most countries in the region are running large trade surpluses with the U.S., resulting in a large accumulation of dollars, which they have plowed into U.S. government and agency bonds. Any disruptions to the U.S. economy, a major market for Asian exporters, would also have serious implications for Asia.
Xia Bin, an academic adviser to the People's Bank of China, warned that the dollar would continue to weaken. "The U.S. dollar will be in the depreciation trend in the long term," he said.
Australia Treasurer Wayne Swan on Sunday said an uncertain outlook for the world economy is likely to linger for some time, but prospects for the Asia region remain strong, bolstered by growth in China. "I'm not going to sugarcoat the fact that the global economic outlook remains uncertain and this uncertainty is likely to continue for some time," he wrote in his weekly economic note.
"The prospects for our region remain much stronger as the weight of global activity continues to shift from West to East," he said, noting continuing strength in China, a quicker than expected recovery in Japan and growth across the region.
"Japan shows there is life after a debt downgrade," said Anne Anderson, head of Asia Pacific fixed income for UBS Global Asset Management. "When you have captive investors that believe in the ultimate surety of payment, there is no cause for alarm. U.S. investors will continue to buy U.S. debt."
But if investors see the move as a broad negative on the global economy, strategists said, Asian nations that heavily depend on exports could be hit hard by fund outflows.
"In the short term, money flows in Asia will likely move toward defensive positions, that is toward domestic-focused economies in emerging Asia," said Sandy Lee, head of quantitative strategies for Asia ex-Japan at Nomura Securities in Hong Kong.
Officials in Japan, Australia, South Korea and elsewhere said they expected the move won't curb appetite for U.S. government debt, a mainstay of global markets. But an adviser to the central bank of China, the largest U.S. creditor, said the downgrade would damage the U.S. dollar in currency markets, while others said the move marked a warning to global growth as a whole.
"This is a warning signal whether you are in New York, New Zealand or New Delhi," said Kaushik Basu, chief economic adviser to India's finance ministry.
Meanwhile, the eyes of the investment world will be on the opening of trading Monday in Asia, which will offer the first major indication of how the market will absorb the downgrade. For investors, the move could ultimately boost the attractiveness of Asian assets relative to Western ones, though the immediate fallout could well be a flight from risk that sends stock markets plunging and bond yields rising around the globe. In particular, emerging markets could face greater scrutiny from institutions and investors with a renewed awareness of danger.
The U.S. downgrade "is going to be a seismic event," said Ed Rogers, chief executive officer of Rogers Investment Advisors, the Japan advisory firm of New York-based investment firm Wolver Hill Asset Management.
For Asian governments, the downgrade is bad news. Most countries in the region are running large trade surpluses with the U.S., resulting in a large accumulation of dollars, which they have plowed into U.S. government and agency bonds. Any disruptions to the U.S. economy, a major market for Asian exporters, would also have serious implications for Asia.
Xia Bin, an academic adviser to the People's Bank of China, warned that the dollar would continue to weaken. "The U.S. dollar will be in the depreciation trend in the long term," he said.
Australia Treasurer Wayne Swan on Sunday said an uncertain outlook for the world economy is likely to linger for some time, but prospects for the Asia region remain strong, bolstered by growth in China. "I'm not going to sugarcoat the fact that the global economic outlook remains uncertain and this uncertainty is likely to continue for some time," he wrote in his weekly economic note.
"The prospects for our region remain much stronger as the weight of global activity continues to shift from West to East," he said, noting continuing strength in China, a quicker than expected recovery in Japan and growth across the region.
"Japan shows there is life after a debt downgrade," said Anne Anderson, head of Asia Pacific fixed income for UBS Global Asset Management. "When you have captive investors that believe in the ultimate surety of payment, there is no cause for alarm. U.S. investors will continue to buy U.S. debt."
But if investors see the move as a broad negative on the global economy, strategists said, Asian nations that heavily depend on exports could be hit hard by fund outflows.
"In the short term, money flows in Asia will likely move toward defensive positions, that is toward domestic-focused economies in emerging Asia," said Sandy Lee, head of quantitative strategies for Asia ex-Japan at Nomura Securities in Hong Kong.
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