IMF scolds US for fiscal immaturity

Beijing - The International Monetary Fund (IMF) appealed to Washington yesterday for more stable management of its finances as Asian stock markets rose after US leaders agreed to avoid a debt default and end a 16-day government shutdown.

Just hours before the $16.7 trillion (R165.8 trillion) debt limit was reached, Congress passed and sent a waiting President Barack Obama legislation on Wednesday night to allow more government borrowing and reopen public agencies.

The debt stand-off had rattled global markets and threatened to erode the image of US treasury debt as a risk-free place for governments and investors to store trillions of dollars in foreign reserves. Few expected a US default but some investors sold treasuries over concern about possible delayed repayment and put off buying stocks that might be exposed to an American economic downturn.

IMF managing director Christine Lagarde welcomed the deal but said the shaky US economy needed more stable long-term finances. The deal only permits the US Treasury to borrow normally until February 7 next year and fund the government until January 15.

“It will be essential to reduce uncertainty surrounding the conduct of fiscal policy by raising the debt limit in a more durable manner,” Lagarde said in a statement.

The Tokyo stock market, the region’s heavyweight, gained as much as 1.1 percent yesterday. Markets in China, Hong Kong and South Korea also rebounded from losses.

Still, the congressional cliffhanger might dent longer-term confidence in American government debt, a cornerstone of global credit markets, prompting creditors to demand higher interest. “With the US government’s antics, the risks go up, so the cost of money could go up,” said Nick Chen, a managing partner of Taipei law firm Pamir Law Group.

Big Asian exporters including China and South Korea also faced the risk of a slump in global demand if a US default had disrupted other economies.

Martin Hennecke, the chief economist at The Henley Group, a financial advisory firm in Hong Kong, expressed exasperation at what he said was a failure by US politicians to fix underlying budget problems in the biggest economy. “It’s just show business, to distract from real issues and keep the public busy with nonsense,” Hannecke said.

“What they should negotiate is how to make a bankruptcy negotiation of the US, because they are broke. That’s the issue. It’s not about some stupid debt ceiling.”

China and Japan, which each own more than $1 trillion of treasury securities, had appealed earlier to Washington for a quick settlement. There was no indication whether either government had altered its debt holdings.

South Korea holds $51.4 billion of treasury securities while Taiwan has $185bn.

Earlier, China’s official Xinhua news agency had accused Washington of jeopardising other countries’ dollar-denominated assets. It called for “building a de-Americanised world”, though analysts say global financial markets have few alternatives to the dollar for trading and US government debt for holding reserves.

In Israel, a key American ally in the Middle East, commentators said the fight hurt the US’s overall image.

“There’s no doubt that damage was done here to the image of American economic stability,” Israeli economic envoy to Washington Eli Groner told Israel’s Army Radio. “It’s not good for the financial markets, not in the US and not around the world.”

Hannecke said China and other central banks might want to move assets into other currencies. However, their dollar-based holdings were so huge they could not sell without driving down prices.

He said he would advise clients to stop holding US debt. “Why hold it? There’s no yield, and inflation and interest rate risk are on the up.” – Sapa-AP