US debt default will rock global system: PM

First-ever default will cause financial markets to 'enter uncharted waters'

By Leonard Lim in Nusa Dua (Bali), The Straits Times, 9 Oct 2013

A UNITED States debt default will shake a fundamental element of the global financial system and cause it to enter uncharted waters, Prime Minister Lee Hsien Loong warned yesterday.

"If that fundamental element is shaken - even the US government can default - I don't know what will happen to your spreads or the rest of the complicated system of financial markets. You're going into unchartered waters," he said.

The US government and lawmakers have until Thursday next week to reach an agreement and avoid a first-ever default on US Treasury bonds - a scenario that economists are warning could throw the world economy into a tailspin.

Mr Lee was speaking to reporters at the end of the Asia-Pacific Economic Cooperation (APEC) summit here yesterday.

He referred to the political brinkmanship as an experiment that should be avoided, saying "nobody knows what the impact will be", as it would be the first time such a US default happened.

The buying of US Treasury bills has been to date a "risk-free solution" for governments and institutions with surpluses.

In a CNN interview aired yesterday, Mr Lee said if a solution could not be reached, it would send a negative signal to the world that the US could not resolve its own practical problems.

"I mean, these are problems which you have created for yourself in a game of chicken," he said.

Asked if he was concerned about the impact on the superpower's presence in the Asia-Pacific, even as President Barack Obama has declared a strategic shift towards this region, Mr Lee said: "The concern of course is that if you're unable to get consensus on such important issues, then even though you may have good intentions, will you be able to sustain them and will you be able to support them and fund them and maintain that direction over a period of time?

"We have to hope the Americans will be able to overcome these problems and maintain that direction despite their domestic difficulties."

Mr Obama cancelled a week-long trip to the region and his attendance at both the APEC and East Asia Summits.

In Bali, the US had hoped to make significant strides towards sealing an ambitious trade pact by the year-end.

But Mr Obama's absence has thrown that into doubt, though a statement yesterday from the 12 countries involved in negotiations for the Trans-Pacific Partnership (TPP) said this was "on track".

Leaders from the 21-member Apec, which accounts for more than half of global GDP, pledged in their closing statement to boost trade and investment while avoiding protectionism. They promised to drive a global recovery, in part by implementing "prudent and responsible" economic policies.

APEC SUMMIT
TPP deal is still on track, say leaders
Target to complete free trade pact is end-2013 despite setbacks, concerns
By Ignatius Low And Zakir Hussain in Nusa Dua (Bali), The Straits Times, 9 Oct 2013

LEADERS of the 12 countries exploring the ambitious Trans-Pacific Partnership (TPP) free trade deal have said their negotiations remain on track, and the target for completion is still the end of this year.

They said in a joint statement yesterday that their nations have made "significant progress in recent months" on legal provisions that govern access to markets for goods, services, investment, financial services and government procurement.

"We have agreed that negotiators should now proceed to resolve all outstanding issues with the objective of completing this year a comprehensive and balanced regional agreement," the leaders added. They pledged also to ensure the benefits of the agreement are "fully shared" and take into account their countries' different levels of development.

The TPP, a wide-ranging agreement that has been touted as the "gold standard" for future free trade pacts, is being negotiated by 12 of the 21 Asia-Pacific Economic Cooperation (APEC) nations, namely, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam.

Together the countries account for 40 per cent of the world's gross domestic product and a third of the world's trade.

TPP countries held official talks here in Bali last week that culminated in a leaders' meeting yesterday afternoon on the sidelines of the two-day summit of the APEC grouping. The US, which has been the TPP's main proponent, had hoped to announce in Bali that negotiations had been substantially concluded.

But it suffered a blow when US President Barack Obama, who was supposed to chair the leaders' meeting, had to cancel his trip to Indonesia.

In any case, negotiators seem to have been hard-pressed to find broad agreement over many parts of the trade pact. Malaysian Prime Minister Najib Razak said on Monday that some provisions threaten "fundamentally the sovereign right of the country to make regulations and policies".

Sources familiar with the talks also told The Straits Times that Vietnam, for example, had concerns over trade rules that would disadvantage its apparel manufacturing industry. "There are 29 chapters in the TPP and they have concluded negotiations on maybe four to six only," said one source.

TPP leaders recognised these concerns yesterday, saying "stakeholders across the region have provided valuable input". "We look forward to review and consideration of the outcome of our work, consistent with each of our domestic processes," they added.

Speaking at the TPP leaders' meeting, Singapore's Prime Minister Lee Hsien Loong urged nations to press on despite the difficulties. "(We are) right to aim high, to set high standards and craft an agreement that is pro-trade and relevant to modern businesses, but at the same time, we must be pragmatic and recognise the real policy concerns and difficult issues each party faces," he said.

"We must strike a balance between ambition and an agreement that we can sell to our peoples and businesses," added Mr Lee.

He noted that the pact must be in place in each of the TPP countries regardless of their political systems. The statement on the TPP's progress was a postscript to an Apec summit which otherwise saw no breakthrough on major trade issues.

APEC leaders ended the meetings with a vague pledge to implement "responsible macroeconomic policies" in the face of slowing global growth. In their own closing statement, they vowed to fight protectionism and improve links across APEC member eocnomies - in particular through development and investment in infrastructure.

PM Lee pushes for open skies
By Leonard Lim, The Straits Times, 9 Oct 2013

TODAY, many more Americans surf in Bali and Asians trek in Machu Picchu than in 1994, when Asia-Pacific Economic Cooperation (APEC) leaders last met in Indonesia, Prime Minister Lee Hsien Loong said yesterday as he urged all 21 economies in the group to push on with efforts to improve connectivity.

The end goal should be open skies, which typically means more flights between countries.

Mr Lee's push for improved air links was made while he addressed APEC leaders at a closed-door retreat.

Air travel in the region is expected to triple by 2030 as incomes rise and flights get cheaper. The industry will employ 45 million workers and contribute US$3.2 trillion (S$4 trillion) in gross domestic product (GDP).

Singapore, given its status as an international air and logistics hub, can tap into this, Mr Lee told Singapore reporters later yesterday. "We hope that there will be opportunities for us - if you can develop projects, or if you can develop air links. Aviation is an important interest of ours."

Mr Lee cited three other ways for APEC to keep regional cooperation up to date, so as to thrive amid global changes.

First, enhance the trade in services. Mr Lee pointed out that reducing trade costs in services by 10 per cent could grow GDP by US$100 billion.

APEC must also continue progress towards the eventual goal of building a free trade area across the Asia-Pacific.

Finally, it should launch new schemes to meet future needs. He cited the Regional Funds Passport, which would allow cross-border issuing of funds across participating economies, and pave the way for increased regional trade in financial products.

Yesterday, Mr Lee also attended an informal conversation with representatives from Kiribati, the Solomon Islands and Fiji.

In the evening, he left Bali for Bandar Seri Begawan to attend the ASEAN and East Asia summits.

US must stay engaged in region: PM Lee
By Wong Siew Ying, Channel NewsAsia, 6 Oct 2013

The US must remain engaged in the region as it plays an important role - one that no other country or super power can replace, says Singapore Prime Minister Lee Hsien Loong.

He was speaking at a dialogue at the APEC CEO Summit in Bali, Indonesia.

Mr Lee said that despite the challenges in the US currently, it will still be a powerful nation 20 years on.

The US government shutdown and looming debt ceiling have hijacked President Barack Obama's planned visit to Asia.

Mr Obama has scrapped visits to the APEC Summit in Bali, ASEAN meeting in Brunei, as well as meetings in Malaysia and the Philippines.

Prime Minister Lee said that it was a great disappointment that Mr Obama has cancelled his trip.

Mr Lee said: "Obviously we prefer a US government that is working than one that is not, and we prefer a US President who is able to travel and fulfill his international duties to one that is preoccupied with domestic preoccupations.

"It is a very great disappointment to us that President Obama is unable to attend APEC, ASEAN, or make visits before and after that to Malaysia and the Philippines.

"I am sure the hosts must be very disappointed, too. It is also not helpful for the American political system to be gridlocked when you have to make some basic decisions on how to keep your fiscal in a state of balance in the long term and how to strengthen your competitiveness."

The disappointment stems from the fact that the US is a very important partner to Asia, and these meetings are seen as good platforms to further boost ties.

But Mr Lee said he understands President Obama's priorities and hopes the issues in the US can be resolved.

Mr Lee said: "America is a very vibrant and resilient country. Notwithstanding all these problems, I think 20 years down, it will still be a powerful country in the world, and that is good."

As part of its rebalancing strategy, the US has increased its focus on the region to tap Asia's growth, as well as the rise of China.

And Mr Lee said it is important that the US continues this engagement with the region.

Mr Lee said: "In the broader sense, the security and stability in Asia Pacific depends on the key relationships between the super powers and big powers in the region, and the most important relationship is that between America and China - it has to be managed stably and responsibly on both sides with a long-term perspective.

"And America has to continue to be engaged in this region because it plays a very important role which no other country can replace, not China, not Japan, not any other power. And that is something which we continue to encourage in every opportunity."

In assessing the state of the world, Mr Lee said that continued prosperity will depend on countries taking necessary steps nationally to sustain growth as well as working with one another to facilitate trade and economic integration.

On regional growth, Mr Lee said that China cannot be the only story in Asia.

He said: "China has launched a new experimental free trade zone in Shanghai, which is going to have more freedom for services, particularly financial services, but how that works, will be something we will be watching closely.

"But China cannot be the only story in Asia. Asia is a very big continent and the rest of Asia has also to prosper as well, otherwise it would be imbalance, and I think there will be tensions and difficulties that could arise."

Mr Lee added that Japan and Southeast Asia are also part of the Asian growth story.

Japan has moved to boost growth with a combination of monetary and fiscal policy reforms and structural reform as well as participate in the Trans-Pacific Strategic Economic trade talks to open up its economy.

Mr Lee said these structural reforms will take years, but a vibrant Japan is good for the region and the world.

Meanwhile, Mr Lee added that Southeast Asia is doing quite well, all things considered.

He said: "The potential is there, with a combined population of the EU, combined GDP among top ten largest economies in the world."

US default would be 'financial apocalypse'
It would send global economies into recession, and likely into depression
The Straits Times, 9 Oct 2013

WASHINGTON - Anyone who remembers the collapse of Lehman Brothers little more than five years ago knows what a global financial disaster is.

A United States government default, just weeks away if Congress fails to raise the debt ceiling, will be an economic calamity like none the world has ever seen.

Failure by the world's largest borrower to pay its debt - unprecedented in modern history - will devastate stock markets from Brazil to Zurich, halt a US$5 trillion (S$6.2 trillion) lending mechanism for investors who rely on US Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the US and world economies into a recession that probably would become a depression.

Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a US default as anything but a financial apocalypse.

The US$12 trillion of outstanding government debt is 23 times the US$517 billion Lehman owed when it filed for bankruptcy on Sept 15, 2008.

As politicians butt heads over raising the debt ceiling, executives from Berkshire Hathaway's Warren Buffett to Goldman Sachs' Lloyd Blankfein have warned that going over the edge would be catastrophic.

"If it were to occur - and it's a big if - one would expect a series of legal triggers, potentially transmitting the default to many other markets," said Mr Mohamed El-Erian, chief executive officer of Pacific Investment Management, the world's largest fixed- income manager. "All this would add to the headwinds facing economic growth. It would also undermine the role of the US in the world economy."

The US stock market lost almost half its value in the five months following Lehman's failure. The country had its worst recession since the Great Depression, taking the global economy down with it. Unemployment surged to 10 per cent, the highest in three decades.

Another depression was averted only by unprecedented action by the US Federal Reserve, which pumped US$3 trillion into the financial system. The US Treasury provided about US$300 billion of capital for the nation's banks.

Mr Buffett, 83, has asked politicians to stop using the debt limit as a weapon in policy debates. "It should be like nuclear bombs, basically too horrible to use," he told Fortune magazine last week.

The yield on 10-year US bonds dropped to a two-month low of 2.58 per cent on Oct 3.

While short-term bill rates and the cost to insure against a default have risen, volatility in Treasuries has fallen, a sign that investor confidence in the Fed's bond-purchase programme is outweighing worries over the budget battle.

Bond prices did not foretell Lehman's default either. Ten days before the bankruptcy, Lehman bonds were trading at about 95 cents on the dollar, the same as JPMorgan Chase debt at the time.

One unexpected consequence of Lehman's collapse was the seizing up of the repurchase agreement, or repo, market - a form of secured, short-term borrowing used by Wall Street banks and investment firms.

Many of Lehman's trading counterparts discovered the collateral they believed was backing their loans was not there to grab as rules allowed. That scared investors in the rest of the market, closing off other trades and leading to fire sales of securities and further price declines.

A government default could freeze the repo market more than Lehman's collapse because US debt forms its backbone. At least US$2.8 trillion of Treasuries serve as collateral for repo and reverse-repo loans, according to Fed data.

In the event of a default, Treasuries might no longer be eligible as collateral for repo agreements, according to Wells Fargo Funds Management chief fixed-income strategist James Kochan. The cheap funding for the holdings lowers the yields demanded on the investments, and unwinding the positions could amplify losses for lenders and borrowers.

If Treasuries were ejected from the market, "Well, holy cripes", Mr Kochan said.

In 2011, the last time Congress was gridlocked over the extension of the debt ceiling, repo rates rose as money-market funds pulled back as they did not want the risk of holding a security in default.

The US did not default on its debt then. Republicans and Democrats reached a last-minute deal to raise the borrowing limit. Still, the posturing hurt consumer confidence and wiped out US$6 trillion of value from global stocks.

While none of the people interviewed for this story expect the world's largest economy to default this time either, most say the chances of it happening now are higher than in the past.

Less than half of the US debt is held by foreign governments, central banks and other overseas investors, according to Treasury data. A default would throw those holdings into question as well as the dollar's status as the world's reserve currency, said International Monetary Fund former chief economist Simon Johnson.

During the 2011 debt-ceiling scare, foreign investors shunned Treasury auctions for about three months, according to data compiled by JPMorgan.

Even if Treasury prices are not affected by a default, the damage in other markets could be devastating. US stocks fell 7 per cent in one day when Congress rejected the government's bank rescue package in 2008, before passing it a few days later.

The market shocks would be enough to tip the US back into recession and drag the world economy down, according to Mr Desmond Lachman, a fellow at the Washington-based American Enterprise Institute.

BLOOMBERG

Who does the US owe money to?

1. Itself

- Amount: US$11 trillion* (S$13.75 trillion)

- As share of total US national debt: 66 per cent*

Contrary to popular perception, the country the United States is most indebted to is itself. The US government borrows from a host of domestic investors, including federal agencies, banks, the Federal Reserve, local and state governments, and investment funds.

2. China

- Amount: US$1.28 trillion

- As share of total US national debt: 7.7 per cent

China has close to half of its cash reserves invested in US debt.

3. Japan

- Amount: US$1.14 trillion

4. Caribbean banking centres

- Amount: US$287.7 billion

Include the Bahamas, Bermuda, British Virgin Islands and Cayman Islands.

5. Oil exporters

- Amount: US$257.7 billion

Include Venezuela, Iran, Iraq, Indonesia, Kuwait, Saudi Arabia, the United Arab Emirates and Libya.

6. Brazil

- Amount: US$256.4 billion

7. Taiwan

- Amount: US$185.8 billion

8. Switzerland

- Amount: US$178.2 billion

9. Belgium

- Amount: US$167.7 billion

10. United Kingdom

- Amount: US$156.9 billion

Includes the Channel Islands and Isle of Man.

15. Singapore

- Amount: US$81.5 billion

* As of July this year.

SOURCE: US TREASURY DEPARTMENT

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