US External Debt and its Largest Foreign Holders
Valentin KATASONOV | 19.04.2015 | OPINION

US External Debt and its Largest Foreign Holders

The US Treasury and the Board of Governors of the Federal Reserve System recently published the latest statistics on US external debt. As of 31 December 2014, the total amount of debt stood at $17.1 trillion (Table 1). According to the IMF’s preliminary estimates (the final data is not yet available), US GDP in 2014 was $17.416 billion. In other words, the level of US external debt in 2014 reached 98.3 per cent of GDP. Just a little bit more and the US will cross the psychologically important external debt threshold of 100 percent (EU countries crossed it back in 2012). 

Table 1.

US external debt (as of 31 December 2014). 

 

Billions of dollars

%

Total:

17,114.2

100

Government

6,213.6

36.3

Central bank (FRS)

563.5

3.3

Deposit-taking corporations (banks)

2,997.5

17.5

Other sectors of the economy

5,958.1

34.8

Direct investments: intercompany cross-border lending

1,381.5

8.1

Source: US Treasury 

As Table 1 shows, the bulk of the external debt has been created by the US government (36.3 per cent). Almost every year, the government has to issue treasury bonds and other types of debt securities to cover its budget deficit. Some of these securities are distributed within the country, but a good half has to be sold to foreign investors. Of these, foreign official institutions (central banks, finance ministries and other government organisations such as sovereign funds) occupy first place. It is interesting that in the last few years, foreign official institutions have started to buy up not only US Treasury debt securities, but also other types of debt securities issued in the US (Table 2). 

Table 2.

Several US liabilities to foreign official institutions (billions of dollars, end of year/month).

 

2011

2012

2013

2014

January 2015

Total

5,115.0

5,476.2

5,768.8

5,977.7

5,966.8

Liabilities of banks

357.2

372.7

398.4

335.3

340.1

US Treasury liabilities

3,620.6

4,032.8

4,054.6

4,113.1

4,124.4

US agency liabilities

602.3

485.9

442.0

426.5

427.6

Corporate liabilities

664.7

806.2

1,052.8

1,155.8

1,122.8

Source: Board of Governors of the US FRS (official website)

So what kind of conclusions can be drawn from an analysis of Table 2? 

Firstly, for three years (2011-2014) there were no significant changes in the total amount of US liabilities to foreign official institutions. There was a moderate increase in the amount of liabilities: growth over the three years amounted to $862.7 billion, or 14.4 per cent. In other words, the American economy was carrying on with its former way of life on credit. 

Secondly, the bulk of US liabilities to foreign official institutions belongs to the US Treasury (68.8 per cent at the end of 2014). In recent years, meanwhile, American corporations have unexpectedly moved into second place in terms of the amount of liabilities to foreign official institutions. Many foreign treasuries, central banks and sovereign funds have begun to actively build up their reserves by purchasing US corporate securities – stocks and bonds. At the end of 2014, these accounted for 19.3 per cent of the total amount of liabilities. The portfolio of corporate securities belonging to foreign authorities has increased by a factor of 1.7 over the three years. Moreover, foreign monetary authorities prefer to build up their reserves mostly through corporate securities like stocks, since they ensure greater profitability than corporate bonds. At the end of 2014, for example, their portfolio of corporate securities included $1,001.4 billion in stocks (87 per cent) and $154.3 billion in bonds (13 per cent). This is a new phenomenon. Just a few years ago, foreign monetary authorities did not invest in US corporate securities. The main reason for this was probably that as a result of the US quantitative easing programme, the profitability of US Treasury bonds fell to an unacceptably low level. 

It is also possible to note that there were no dramatic changes in the structure and amount of US securities to foreign official institutions in January 2015. 

Table 3.

Geographical distribution of US liabilities to foreign official institutions (billions of dollars, end of year/month).

 

2011

2012

2013

2014

January 2015

Total

5,115.0

5,476.2

5,768.8

5,977.7

5,966.8

Europe

709.9

840.7

899.3

915.3

931.5

Canada

26.7

33.9

37.9

36.3

36.6

Latin America

432.2

498.8

503.1

516.2

523.3

Asia

3,873.8

4,032.9

4,247.3

4,437.8

4,433.1

Africa

43.2

42.4

45.8

40.7

41.1

Other countries

29.8

28.1

36.5

31.2

30.9

Source: Board of Governors of the US FRS (official website)

As Table 3 shows, Asia accounts for the lion’s share of all liabilities (74.2 per cent at the end of 2014), where China and Japan are first and second in the world in terms of the size of their blocks of US Treasury securities. This figure for Europe is 15.3 per cent and 8.6 per cent for Latin America. Between 2011 and 2014, Europe demonstrated the biggest growth (by 29 per cent). America needs its European allies to help it more actively by buying up US liabilities. 

The US Treasury has also published the latest statistics on the distribution of Treasury bonds and other Treasury securities by country (Table 4). 

Table 4.

Distribution of bonds and other US Treasury debt securities by country (as of the end of January 2015, billions of dollars).

 

 

Billions of dollars

%

 

Total

6,217.9

100

1

China

1,239.1

19.9

2

Japan

1,238.6

19.9

3

Belgium

354.6

5.7

4

Caribbean countries

338.5

5.4

5

Oil-exporting countries

290.0

4.7

6

Great Britain

207.0

3.3

7

Switzerland

205.5

3.3

8

Luxembourg

176.0

2.8

9

Hong Kong

172.0

2.8

10

Taiwan

170.6

2.7

 

15

Turkey

82.4

1.3

16

Russia

82.2

1.3

Source: US Treasury 

Table 4 shows the volume of Treasury securities held not only by the official authorities of these countries, but also by other holders of US Treasury securities. As can be seen from Table 2, foreign official authorities had a $4,124.4 billion portfolio of US Treasury securities at the end of January 2015. Therefore, Treasury securities amounting to $2,093.5 billion belonged to other foreign holders. The category of ‘other holders’ (‘unofficial institutions’) includes pension funds, banks, insurance companies, investment funds and so on. These ‘other holders’ accounted for a third of all US Treasury securities outside of the US. 

The main holders of US Treasury securities are China and Japan. While China used to sit confidently in first place, the positions of the two countries equalised at the beginning of this year. As China began to put a brake on its build up of Treasury securities, Japan did the opposite and began to increase its build up (possibly under pressure from Washington). Belgium, which in 2012 was not even among the top ten holders of Treasury securities, recently, and quite unexpectedly, moved into third place. 

In 2012, Russia was eighth on the list of holders of US Treasury securities. At that time, the country accounted for $145.7 billion. By January 2015, it had reduced its amount of Treasury securities to $82.2 billion, putting the country in 16th place (after Turkey). Some of the US Treasury securities that form part of Russia’s international reserves are stored in the depository of the US Federal Reserve (how much exactly is unknown). In view of Washington’s threats to freeze Russia’s international reserves, Russia’s monetary authorities have the task of withdrawing the Treasury securities from the Federal Reserve’s depository. Transforming these US Treasury securities into more robust reserves as a protective measure against economic sanctions would prove even more effective. The most secure of these is gold. Recently, Russia has started to accelerate its build up of gold reserves as part of its international reserves. According to the World Gold Council, Russia’s gold reserves equalled 384.4 tonnes at the beginning of 2000, by the beginning of 2010 they had increased to 788.6 tonnes, and by 1 February 2015 they had reached 1,208.2 tonnes. In terms of the largest holders of gold reserves, the picture looks quite good. Note that between 2000 and 2015, countries like the US, Germany, Italy and Japan kept their gold reserves at a constant level, while countries such as France, Switzerland and Holland even reduced their gold reserves quite significantly. It is possible that only China could rival the rate with which Russia is building up its gold reserves. 

However, although Russia and China’s gold reserves are relatively large, the share of gold in their international reserves is still considerably less than that of leading countries in the West. China’s share is equal to 1 per cent (a clearly underestimated figure), while Russia’s is 12 per cent (as of the beginning of 2015). For comparison, here are the figures for some countries in the West (per cent, beginning of 2015): Germany – 67.8; France – 65.6; and Portugal – 75.3. The figure is also high for some countries outside of the ‘golden billion’. As a rule, these are countries fighting to restore their economic sovereignty. The share of gold in Venezuela’s reserves, for example, currently stands at 69.3 per cent. 

It makes sense to replace the currency (especially the dollar) component of international reserves because the era of cheap gold in the world is coming to an end. A sharp increase in the price of gold is anticipated. This is indirectly indicated by events like the end of the London Gold Fix in March 2015. The world is moving over to a new, more liberal system for setting gold prices. In these new conditions, Russia has a big advantage over other countries – it is one of the leading gold-producing countries. 

Tags:   US 

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