China Downgrades US Debt, While Defaulting on Trillions of Its Debt to US Bond Holders
Jonna Bianco, Chauirman of American Bondholders Foundation with Republic of China Bond
Capitol Hill, Washington
The American Bondholder Foundation (ABF) issued a statement, today on China’s downgrade of US Treasuries following the passage of the compromise debt limit and deficit restructuring act signed into law yesterday by President Obama.
“China’s Dagong sovereign debt rating agency downgraded US Treasuries for the third time in less than two years from A+ to A, while the Peoples Republic of China (PRC) has defaulted on potentially trillions of Chinese bonds held by Americans,” said Jonna Bianco, Chairperson of the American Bondholders Foundation (ABF).
According to the Financial Times(FT) the latest Dagong downgrade rating action would put US Treasuries on par with Russia and South Africa, but lower than China, Malaysia and some 23 others. FT noted:
Dagong was scathing in its criticism:
Though this decision [raising the debt ceiling] enables the government to continue the practice of repaying its old debt through raising new debt, it has not changed the general trend that the increase in national debt outpaces [growth of the] economy and revenue, making this incident a turning point for the US government’s solvency to decline even further.
Among the reasons cited for the downgrade, Dagong noted: “defects in the political structure, insufficient driving forces for national economic growth” and “radical deterioration in state management capability.
ABF’s Bianco said, “The US government has neglected to pursue potential debt swaps and offsets of Chinese bonds issued by the Republic of China (ROC) prior to 1950 and held in trust for thousands of American bondholders in more than 43 states by ABF.” Bonds held in trust by ABF for US citizens are estimated to be worth more than $750 billion. If offset against Chinese holdings of US Treasuries, currently estimated at over $1.1 trillion, that could yield upwards of $250 billion in proceeds to bondholders, federal and state tax revenues and stimulate much needed job growth. See our earlier Iconoclast post on the ABF proposal, here.
Bianco suggests that there could be as much as 10 times the private holdings of these Chinese bonds in US government possession potentially worth trillions.
She said, “the US Treasury, State and Justice Departments have thwarted the ABF and other groups endeavoring to have our government settle claims for selectively defaulted bonds with the People’s Republic of China (PRC).” This despite opportunities during the 1979 negotiations over settlement of claims on confiscated properties of American citizens in exchange for the PRC receiving Most Favored Nation trading status in February, 1980. Similar opportunities for negotiating debt swaps occurred in the wake of the PRC settlement with British Bondholders in 1987. Moreover, the US government has assisted China’s economic expansion by supporting her admission to the World Trade Organization achieved in November, 2001. Our Treasury has opened up economic offices in China for the express purpose of selling the PRC Treasuries to offset a current Trade Deficit of over $273 billion. According to Reuters, it is the largest trade deficit the US has with a single country. China has arrogantly and selectively refused to acknowledge and settle outstanding ROC debt in contradiction of the Successor Government Principles of International Law. Our US State Department has even gone to Court in this country to invoke sovereign immunity in litigation brought by American bondholders of ROC debt issued prior to 1950 depriving them of rights of private negotiations on selective default.
According to the Wall Street Journal(WSJ), China's holdings of US debt in February, 2011 fell $9.20 billion to $1.145 trillion, following net selling of $600 million.
The WSJ noted:
In contrast, Japan has been a heavy net buyer in recent months, accumulating Treasuries at record levels. Japan remained the second-largest holder of Treasuries, lifting its holdings to $907.9 billion from $890.3 billion in February.
Because of China’s refusal to acknowledge its lawful obligation to pay prior regime debts, ABF has proposed legislation that has the bi- partisan backing of Republican and Democratic Members of Congress and US Senators. The legislation provides authority for the US Treasury to negotiate and conclude debt offsets with the PRC through the Office of Foreign Asset Control.
Given the tenuous debt and deficit reduction legislation reached on August 2nd, Bianco suggests that negotiating offsets on Chinese bonds with the PRC could contribute to lowering China’s exposure to US Treasuries, while reducing Federal debt and providing hundreds of billions of dollars to stimulate job creation while producing substantial federal and state tax revenues. All without increasing federal expenditures or raising new taxes.
“Congress believes this is a win-win strategy,” said Bianco. She said, “Time to move on this useful solution to current debt problems facing this country.”