US fis­cal health worse than Europe’s: China ad­viser

The Pak Banker - - International3 -

BEI­JING: The U.S. dol­lar will be a safe in­vest­ment for the next six to 12 months be­cause global mar­kets are fo­cused on the euro zone's trou­bles but Amer­ica's fis­cal health is worse than Europe's, an ad­viser to the Chi­nese cen­tral bank said on Wed­nes­day.

Li Daokui, an aca­demic mem­ber of the cen­tral bank's mon­e­tary pol­icy com­mit­tee, said that U.S. bond prices and the dol­lar would fall when the Euro­pean eco­nomic sit­u­a­tion sta­bi­lized.

"For now, mar­ket at­ten­tion is still on Europe and for the com­ing 6-12 months, it will not shift to the United States," Li said, when asked about U.S. Pres­i­dent Barack Obama's plan to ex­tend tax cuts for all Amer­i­cans. "But we should be clear in our minds that the fis­cal sit­u­a­tion in the United States is much worse than in Europe. In one or two years, when the Euro­pean debt sit­u­a­tion sta­bi­lizes, at­ten­tion of fi­nan­cial mar­kets will def­i­nitely shift to the United States. At that time, U.S. Trea­sury bonds and the dol­lar will ex­pe­ri­ence con­sid­er­able de­clines."

U.S. Trea­sury prices fell sharply for a sec­ond day on Wed­nes­day as the pro­posed tax deal sparked con­cerns over the govern­ment's abil­ity to ser­vice its mas­sive debt bur­den. Moody's In­vestors Ser­vice said it is wor­ried the tax cuts could be­come per­ma­nent, hurt­ing U.S. fi­nances and credit rat­ings in the long run.

In Europe, Ire­land's par­lia­ment passed the first in a se­ries of res­o­lu­tions un­der­pin­ning its 2011 aus­ter­ity bud­get on Tues­day, mark­ing the first step in a lengthy ap­proval process. But in­vestors are now wor­ried that the re­gion's debt cri­sis could en­gulf Por­tu­gal next, or Spain.

China has a big stake in the per­for­mance of dol­lar as­sets. The coun­try holds the world's biggest stock pile of for­eign ex­change re­serves at $2.64 tril­lion and an es­ti­mated two-thirds of that is in­vested in dol­lar as­sets, in­clud­ing U.S. Trea­suries. The State Ad­min­is­tra­tion of For­eign Ex­change (SAFE), an arm of the cen­tral bank, is re­spon­si­ble for man­ag­ing re­serves. -Reuters

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