China: Replace U.S. dollar as global reserve currency

Washington's debt limit standoff could accelerate efforts to find an alternative.

LOS ANGELES TIMESOctober 15, 2013 

  • SENATE LEADERS NEAR FISCAL DEAL; HOUSE UNCERTAIN

    Negotiators talked into the evening as senators from both parties coalesced around a plan that would lift the debt limit through Feb. 7, pass a resolution to finance the government through Jan. 15 and conclude formal discussions on a long-term tax and spending plan no later than Dec. 13, according to one Senate aide briefed on the plan.

    But while both Sen. Mitch McConnell of Kentucky, the Republican leader, and Sen. Harry Reid of Nevada, the Democratic leader, praised the progress that was made in the Senate, it was already clear that the most conservative members of the House were not going to go along quietly with a plan that does not accomplish their goal from the outset of this two-week crisis: dismantling the president's health care law.

    "We've got a name for it in the House: It's called the Senate surrender caucus," said Rep. Tim Huelskamp, R-Kan. "Anybody who would vote for that in the House as Republican would virtually guarantee a primary challenger."

    There have been other showdowns between Republican lawmakers and President Barack Obama that went to the last minute: In 2011, lawmakers reached a deal to raise the nation's debt ceiling two days before officials said a default was possible, resulting in a stock market plunge and the downgrading of the nation's credit rating.

    "If Republicans aren't willing to set aside their partisan concerns in order to do what's right for the country, we stand a good chance of defaulting, and defaulting could have a potentially devastating effect on the economy," Obama told reporters at Martha's Table, a Washington-area food bank.

    New York Times News Service

WASHINGTON - Five years after the U.S. financial crisis helped cause a deep global recession, foreign leaders are worried that history is going to repeat itself.

The fiscal impasse that has partially shut the federal government now threatens to trigger a U.S. default that could roil financial markets worldwide, leading an agitated China to suggest selecting a different international reserve currency.

"As U.S. politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world," China's official state-run news agency, Xinhua, said in an English-language commentary Sunday.

There is no viable alternative to the dollar as the centerpiece of the global financial system, and there probably won't be for the foreseeable future, experts said.

"The U.S. remains the core of the global financial system at this point," said Nicolas Veron, a senior fellow at Bruegel, a think tank in Brussels. "But the sort of thing happening in the U.S. might move people toward a system less reliant on the U.S."

China echoed calls from world financial officials urging an end to what it called the "pernicious impasse" in the U.S. over funding the government and raising the $16.7 trillion debt limit.

The Treasury Department has said the debt limit must be raised by Thursday or it will run out of borrowing authority. That would leave it dependent on just cash on hand and incoming revenue to pay the federal government's bills.

Given the world financial system's dependence on the dollar, a default on payments of interest or principal on U.S. Treasury bonds would be catastrophic for the global economy, analysts said.

Treasury bonds and other dollar-based investments are used as the main form of collateral worldwide, so questions about their security would cause more problems than the financial system failures in fall 2008, said Benjamin J. Cohen, an international political economy professor at the University of California, Santa Barbara.

"It would make the Lehman Bros. episode look like a garden party by comparison," Cohen said.

Most countries hold their foreign exchange reserves in U.S. dollars because the currency is viewed as the world's most stable.

"The very fact that more than 60 percent of central banks' reserves are in dollars gives them every reason to be concerned," Barry Eichengreen, a professor of economics and political science at UC Berkeley and a former senior policy adviser at the IMF, said. "If the bank in which you held 60 percent of your savings was threatening to default, you'd be concerned too."

China is the largest foreign holder of U.S. debt, with about $1.3 trillion in Treasury bonds, and probably more in other dollar-denominated investments.

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