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Arab countries are vulnerable to significant losses as a result of the recent decline in the value of US Treasury bonds, due primarily to the ballooning of the US public debt to its legal limit.
This article was translated from Arabic.
These bonds represent the American government’s public debt, making these countries vulnerable to significant losses as a result of the recent decline in the value of these bonds, due primarily to the ballooning of the US public debt to its legal limit.
Furthermore, these Arab countries face the risk of the US defaulting on its debts in the medium term, which could have a catastrophic impact.
American public debt risks
On February 6, 2023, Brian Moynihan, the CEO of Bank of America, the second-largest bank in the US, warned that the potential for the United States to default on its debt could no longer be disregarded. Consequently, Moynihan advised that “other countries around the world” prepare for the chance that US Treasury bond payments may be suspended, directly referencing the detrimental effects such an event could have on their respective economies.
US Treasury Secretary Janet Yellen provided a more precise assessment of the issue by explicitly stating that the United States could default on its obligations as early as June 2023 if the matter of the US public debt reaching its legal ceiling were not addressed.
According to Yellen, the outcome of this potential event would be nothing short of a “new global financial crisis.” At present, the Treasury is utilizing “extraordinary measures” in an effort to delay this possibility as much as possible, thus enabling the continued payment of bills until the crisis is resolved.
The question of the legal limit on American public debt
The sizeable public debt of the United States—known as the public debt ceiling—which has reached a record high of $31.38 trillion is the primary factor to the growing issue.
When this cap is met, the federal government of the United States will no longer be able to borrow money on the financial markets to cover its budget deficit or to pay its debts’ interest and principal. This is the reason Moynihan and Yellen have expressed worry about the likelihood of a public debt security default in the upcoming months.
The solution to this problem lies with the US Congress, which has the power to increase the legal maximum limit for public debt or temporarily suspend it. However, the US administration has thus far been unsuccessful in obtaining such a resolution from Congress, given the insistence of the Republicans – who hold the majority in the House of Representatives – on implementing a plan to reduce government spending before approving any increase in the legal debt ceiling.
On the other hand, the Democratic Party, which currently holds the White House and the Senate, is unwilling to negotiate a reduction in government expenditures, as requested by Republican representatives. The Republican’s plan to reduce expenditures is expected to involve severe austerity measures, which could lead to popular resentment against the US administration and the Democratic Party, especially in light of the high inflation rate and the declining purchasing power.
Consequently, the issue of increasing the legal debt ceiling has become mired in finger-pointing and political pressure between the two parties, with each accusing the other of responsibility for the current impasse.
US public debt: A ticking time bomb?
Currently, many analysts predict that the possibility of a US default on public debt securities will persist in the coming years, even if the problem is temporarily addressed by raising the legal debt ceiling in 2023.
This period has seen the US public debt reach 130 per cent of the country’s GDP, coinciding with a significant rise in global interest rates, which will contribute to the medium-term acceleration of this debt. Furthermore, economic growth rates have been modest, relative to the rapid growth of public debt, which will increase the burden of debt on the US public budget.
These analyses indicate that the public debt ceiling is a ticking time bomb that will eventually explode. Raising the current legal public debt ceiling will only delay addressing the problem, similar to what happened in 2011 and 2013.
Most likely, the crisis will also affect the credit rating of US Treasury bonds in the coming months, as it did during similar previous crises in 2011 and 2013. This development will increase the borrowing costs for the US government due to the high risks of its debt, and will also further inflate the US public debt.
It is most likely that the crisis will have an effect on the credit rating of US Treasury bonds in the coming months, as was the case in 2011 and 2013. This development will increase the US government’s borrowing costs and further increase the nation’s public debt due to the high risks associated with its debt.
Affected Arab countries
The US Treasury bond market and investors, including those from Arab nations, have suffered serious losses as a result of the present crisis. Since the start of 2022, the value of US Treasury bonds has decreased by 13 per cent as a result of the waning confidence in US national debt. As a consequence of the bonds’ declining market value, Arab nations that invested in them have lost part of their investments.
A market shock is anticipated if the United States stops making payments entirely, either this year if the legal debt limit is not increased or in the following years if this ceiling is raised and the issue reappears. US Treasury bonds are expected to lose most of their market value as investors rush to sell them. If bond payments are suspended, their interest payments will also be frozen, resulting in greater losses for Arab countries.
The volume of Arab countries’ investments in US Treasury bonds
According to the data, 11 Arab countries have invested around $258.2 billion in US Treasury bonds, accounting for 3.4 per cent of the world’s investments. Arab countries have traditionally held on to these bonds as strategic reserves and safe long-term investments. The distribution of these investments among the Arab countries is as follows:
- The Kingdom of Saudi Arabia: ranks first among Arab countries in terms of its investments in the US public debt, with a value of around $116.7 billion. This means that the Kingdom alone owns 45 per cent of the total value of US Treasury bonds owned by Arab countries.
- Kuwait: ranks second with investments worth approximately $50.6 billion, accounting for 20 per cent of the total Arab countries’ investments in US Treasury bonds.
- The United Arab Emirates: ranks third, with investments worth approximately $46.3 billion, representing 18 per cent of the total Arab countries’ investments in US Treasury bonds.
- Iraq: ranks fourth with investments worth around $24.1 billion.
- Qatar: ranks fifth with investments worth nearly $5.7 billion.
- The Sultanate of Oman: ranks sixth with investments worth approximately $5.3 billion.
- Morocco: ranks seventh with investments worth about $3.7 billion.
Given that the GCC nations jointly own assets worth $226.1 billion, it is evident that they will be particularly affected by the US Treasury bond crisis. It is therefore anticipated that these nations will look to diversify their holdings of sovereign debt assets in the following phase.
This implies that in addition to American treasury bills, they will consider buying more debt securities issued by other governments. In doing so, Gulf governments will decrease the risks that could result from a dependence on US public debt investments.