Los Angeles Times
WASHINGTON: Upset that the fiscal stalemate in Washington is threatening the global economy, China called for the U.S. dollar to be replaced as the international reserve currency as well as for broader steps to create a “de-Americanized world.”
China also called for an end to the “pernicious impasse” in the U.S. over the raising the debt limit and ending the partial government shutdown, saying the world needed another reserve currency so nations could protect themselves “from the spillover of the intensifying domestic political turmoil in the United States.”
Most countries hold their foreign exchange reserves in U.S. dollars because the currency is viewed as the world’s most stable. China is the largest foreign holder of U.S. debt, with about $1.3 trillion in Treasury bonds, and is concerned about the impact of a U.S. failure to raise the debt limit on those holdings.
With Washington politicians still far from a deal as the Thursday deadline for raising the $16.7 trillion debt limit looms, China’s official state-run news agency published a sharply worded editorial Sunday criticizing U.S. leadership.
“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,” the Xinhua news agency said in an English-language commentary.
China’s concerns echo those of economic officials around the world about the effects of a failure to raise the U.S. debt limit, which could trigger the federal government’s first-ever widespread default.
Banks plan for default
Christine Lagarde, head of the International Monetary Fund, told NBC’s Meet the Press on Sunday that global finance ministers are worried the uncertainty surrounding a U.S. default “would mean massive disruption the world over, and we would be at risk of tipping yet again into a recession.”
Central banks have begun making contingency plans on how they would keep financial markets working if the U.S. defaults on its debt.
Policymakers discussed possible responses when they met at the International Monetary Fund’s annual meetings in Washington over the weekend, said officials who spoke on condition of anonymity because the talks were confidential. The discussions continued as policymakers headed home.
“Because in the past it’s always been sorted out is absolutely not a reason to fail to do the contingency planning,” Jon Cunliffe, who joins the Bank of England as deputy governor for financial stability next month, told lawmakers. “I would expect the Bank of England to be planning for it. I’d expect private-sector actors to be doing that, and in other countries as well.”
The initial response from the world’s central banks would likely echo their actions after the collapse of Lehman Brothers Holdings Inc. in 2008. The $12 trillion of outstanding U.S. government debt is 23 times the $517 billion Lehman owed when it filed for bankruptcy.
Global financial policymakers maintain that a default is unlikely.
“It’s unthinkable that an agreement won’t be found,” European Central Bank President Mario Draghi told reporters in Washington. Japanese Finance Minister Taro Aso told Bloomberg Television’s Sara Eisen that “there’s no other way than for the U.S. government itself and the U.S. Congress to sort it out.”
Bloomberg News contributed to this report.