Potential USD collapse

This article posted this morning represents the single greatest threat to the property market (and every other market) worldwide. Watch this space…

http://www.smh.com.au/business/debt-crisis-looms-for-us-public-finances-20100112-m4mx.html

Debt crisis looms for US public finances
AMBROSE EVANS-PRITCHARD
January 13, 2010

Fitch Ratings has issued its starkest warning that the US will lose its AAA credit rating unless it acts to bring the budget deficit under control, citing a spiral in debt servicing costs and dependence on foreign lenders.

Brian Coulton, the agency’s head of sovereign ratings, said the US was shielded for now by its pivotal role in global finance and the US dollar’s status as the key reserve currency, but the picture was deteriorating fast enough to ring alarm bells.

”Difficult decisions will have to be made regarding spending and tax to underpin market confidence in the long-run sustainability of public finances. In the absence of measures … over the next three to five years, government indebtedness will approach levels by the latter half of the decade that will bring pressure to bear on the US’s AAA status”, he said.

Fitch expects the combined state and federal debt to reach 94 per cent of gross domestic product next year, up from 57 per cent at the end of 2007. Federal interest costs will reach 13 per cent of revenues. Most fiscal experts view this level as dangerously close to the point of no return for debt dynamics.

The rating alert is a reminder that fiscal stimulus and bank rescues across the world have merely shifted private debt on to public shoulders. The bailouts looked deceptively ”costless” at the time, but the damage to sovereign states may take years to repair.

The US Treasury says interest payments as a share of GDP will rise to 3.6 per cent by 2016, the highest since the data began in 1940 – when it was 0.8 per cent.

Mr Coulton said the US was vulnerable to ”potential interest rate shocks” due to its reliance on short-term debt and foreign investors. The average maturity of US Government debt has fallen to four years, compared with seven for Europe’s AAA club. ”The share of three-month bills has risen very sharply as a result of recapitalising banks,” he said.

This raises the danger of a roll-over crisis. Chinese, Japanese and Middle Eastern investors own almost half of the stock of US debt. They are more likely to liquidate holdings than domestic investors, if there were a loss of confidence.

Telegraph, London