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Author`s name Dmitriy Sudakov

USA prepares to immortalize its huge debt

World markets took a break for Christmas and New Year time. However, a new portion of economic rumors compensated the absence of important macroeconomic news. Experts say that the United States will manage to extricate from the financial crisis with a whole skin despite the nation’s enormous foreign debt.

The US state debt has become $10 trillion larger under George W. Bush’s rule. “The debt amounted to $4 trillion in 2001, and now it is evaluated at some $14 trillion,” an analyst with Ricom Trust Investment Company, Oleg Abelev told Bigness.ru.

“It is obvious that it is impossible to repay such a large debt. The rumors about a new issue of 100-year bonds of the US government prove that. Virtually, it will be an attempt to lay the burden of the debt on the shoulders of new generations,” PR Director of Kalita Finance Financial Group, Aleksei Vyazovsky said.

It would be an unexampled step for the USA to make: state-guaranteed debt securities with such a long circulation period have never been issued before. However, Walt Disney Co. issued 100-year bonds in 1993. Ford Motor Co. sold $500 million of 100-year bonds in 1997: the whole issue was sold in only 25 minutes.

The securities market serves as the main source to cover the budget deficit in modern-day economy. The majority of developed countries hold their state debts in the form of securities. State-guaranteed securities make over 99 percent of the debt of the US federal government.

“To issue 100-year bonds seems to be one of the easiest ways to solve the problem of the US budget deficit, which currently amounts to over $450 billion and has all chances to overcome the level of $1 trillion next year,” analyst with Euro Finance Investment Company, Svetlana Mitrofanova, told Bigness.ru.

“The pluses of this step are obvious. It is possible to refinance short-term debts (of up to three years) with the help of 100-year bonds. Besides, it will be future generations to repay the 100-year loan,” the expert said.

Thirty-year bonds are the longest state-guaranteed securities in the United States for the time being. They were not issued from 2001 to 2006, which was connected with the budget surplus, achieved under Bill Clinton’s administration.

“The country may lose its image on the international arena in case the securities are placed unsuccessfully,” Svetlana Mitrofanova said.

Vladimir Detinich, a senior analyst with Olma Investment Group, believes that the 100-year bonds will enjoy a high demand on the market.

“Let’s take China , for example. They said that China did not want to purchase US debts, but they had no other choice: debt instruments in other currencies will not be enough for China . One has to acknowledge that the dollar remains the main reserve currency, and there is no replacement to it. That is why all countries will have to purchase those bonds no matter whether they are willing to do it or not,” the expert said.

America may issue a new world reserve currency to run away from its debts.

“The amero was thought to be this new currency a month ago. Now they talk about the SDR – Special Drawing Right Currency issued by the International Monetary Fund since 1981. The non-cash SDR is based on the basket of the dollar, the euro, the yen and the British pound. The dollar share amounts to a bit more than 40 percent in the basket. If SDR bank notes become materialized, the dollar may drop against the new payment instrument, which will subsequently devaluate the US debt,” Aleksei Vyazovsky said.

Natalia Lesina, an analyst with Alor Group of Companies, believes that the US debt can disappear as a result of hyperinflation.

“The USA is currently conducting a program to support various financial structures and the real sector of economy, which naturally increases the state debt. Hyperinflation seems to be the most probable progression of the debt issue,” the expert said.

“They will now restructure the debt to make it longer. However, they will have to repay the debt someday anyway. That’s why it seems to me that the USA will prefer to turn its printing machines on and push the dollar devaluation idea aside. We will see the first vestiges of the inflation already next year. It will be a very painful process for the economy, but the problem will be solved,” the expert said.

Ekaterina Yevstigneyeva
Bigness.ru

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