How is foreign power in US public debt changing?
Gulf states take a step forward in controlling the sovereign debt of the US giant
Many different types of changes have shaken the economic, political and international foundations on which the world was built in recent years. The new balances of power, the Sino-US trade war, the arrival of the coronavirus, concerns about the threat of climate change and the energy and food consequences of the war in Ukraine are just a few examples of major transformations that have changed the individual, social, state and international paradigms that governed the whole of our lives.
In this scenario, a large part of Western countries prepared, with the arrival of Covid-19 in 2020, to guarantee the welfare state of their citizens by implementing social spending measures that - although effective - in most cases led to a significant growth in national public debts. This is the case of the US economy.
The US giant had already been registering large increases in debt over the last decades, but the 30 trillion dollars (more than 26 trillion euros) was a figure that, until the beginning of this year, had never been reached. A historical record that placed it at the top of the list of countries with the highest public debt in the world in absolute figures. Or, at least, this is how the world's media announced the information that the Treasury Department - equivalent to the Ministry of Economy - made public, while the country's Federal Reserve (Fed) raised interest rates for the first time.
If the sovereign debt of each of the countries is already relevant in itself for analysing the international chessboard as a whole, when it comes to US sovereign debt, the figures are key. In the words of the Chinese newspaper 'The Global Times', "US Treasury bonds are not only the anchor for setting global asset prices, but also play an important role in the dollar liquidity transmission system".
But what are Treasury bonds and what does public debt reflect? According to Andrés Sevilla Arias, a member of the investment professionals' association Instituto CFA, public or sovereign debt is the result of the combined expenditure of all public administrations. When a public deficit is incurred - because revenues are lower than expenditures - then the government issues debt securities that investors (whether public or private, domestic or foreign) purchase. These securities can be Treasury bills - which, in the US, are investments ranging from four to 52 weeks - and government bonds or debentures - longer term, 20 to 30 years.
These types of investments, which are not very risky for investors, generate returns that correspond to interest rates (which will be higher the lower the market's confidence that the government can pay back the money). In other words, the higher the credit quality, the lower the risk, the lower the interest rates, and therefore the lower the profitability. And vice versa.
With this in mind, it is understandable that 'The Global Times' claims that "potential risks in the US Treasury market may end up having a systemic impact" on the global economy. Especially after successive announcements by the Fed, which has enacted four consecutive interest rate hikes in the last five months, reaching the highest rates since 2008.
However, the upward trend in US sovereign debt is nothing new. The wars in Iraq and Afghanistan and the recession of 2008, before the Covid-19 pandemic, already forced stimulus programmes and increased government spending in the face of dwindling tax revenues due to widespread unemployment. And the same happened during earlier historical events such as the American Civil War. As an article in Usa Today explained in 1995, the country's public debt grew during the Cold War as "a loan for the future" to "limit, but without limiting, social spending". A thesis that, arguably, also explains Washington's - and many other Western countries' - measures to deal with the current successive crises.
As Carta Financiera's CEO, Miguel Boggiano, explained in 2021 for the economic media 'Ámbito Financiero', the US public debt of that year was mainly divided into five groups. The first group - which held the largest amount of debt securities - was that of private US investors (including private pension funds, insurance companies and retail investors), which accounted for more than 31% of the total. The second largest creditor group was foreign countries and private investors (25%), followed closely by the country's state pension funds (22%) in third place, and the Federal Reserve and US banks in fourth and fifth place respectively.
As it does every month, just a few weeks ago the US Treasury published the financial report on the national economy's financial statements, which includes details of the public debt and the list of creditor countries of the country's debt securities. And, as has been the case since 2019, Japan was once again at the top of the ranking, with an investment of 1,078.2 billion dollars in government bonds - down from around 1,100 billion dollars at the end of July.
As Miguel Boggiano explained, "the [foreign] demand for US bonds has been weakening since 2014". This is evidenced not only by Japanese participation - which, apart from having fallen in recent months, has not grown since 2019 - but also by Chinese investment.
In addition to the Sino-US trade war and the consequent economic and commercial obstacles imposed by Donald Trump during his term in the White House - which in 2019 ended up placing the Asian giant in second place in the table, after having been the country's largest creditor for years -, the consequences of the pandemic, global inflation, international polarisation and Washington's financial transformations have recently been added, which seems to have further encouraged Beijing to reduce its investment in Yankee debt securities. China's share of US debt holdings has fallen by about $25 billion since July.
However, far from Japan, China and the UK, which have reduced their investment levels since the last US Treasury report; the Gulf countries have seen their role as Washington's creditors strengthened. Together, the group of seven Middle Eastern Arab countries holds more than $240 billion in Treasury bills and government bonds and notes, and ranks - as a bloc - as the eighth largest debt holder.
Individually, it is the Wahhabi Kingdom of Saudi Arabia that holds the largest amount of US debt in the Gulf. 121.1 billion dollars, which places it in sixteenth place in the ranking, and which is distributed in such a way that 85% of this amount represents long-term and fixed-income bonds (more than 103 billion), and the rest in bills and short-duration bonds (some 17 billion). These figures show a growth of more than 3.5% in Saudi investment in the US since 2016, when the Obama administration's Treasury Department publicised Saudi involvement in US finance in the face of the threat of a possible diplomatic row over a bill that would allow Riyadh to be held accountable for an alleged link to the 9/11 attacks.
For its part, the United Arab Emirates, second on the list of Gulf countries with the largest amount of US debt securities, increased - like Riyadh - its share of the US economy to $53.9 billion, while Kuwait reached $50.3 billion, Oman $7 billion, Qatar $6.4 billion and Bahrain $1.4 billion.
This strengthening of the Gulf's economic influence over US finances coincides, temporarily, with one of the best economic years for the region. In the last 12 months alone, the GDP (Gross Domestic Product) of the seven countries has risen by more than 25% due to the increase in oil and gas demand caused by the cuts in energy supplies from Russia. This growth translates into more than 1.68 billion dollars in additional income.
On the diplomatic front, however, the news comes at a somewhat tense moment, in the context of relations between Washington and Riyadh marked by ups and downs. The recent decision by OPEC+ (in which Saudi Arabia plays a key role) to cut oil production by two million barrels a day, while global demand grows, crude prices rise, and Moscow cuts supplies, has caused a rift between two powers that -since Trump's departure from the White House- have seen their ties begin to become strained.
In the words of analyst Pablo del Pozo, in the digital media Descifrando la Guerra, it could be said that the Gulf countries' relationship with the United States has changed "towards a new, more independent direction [...] where economic and diplomatic benefits for the country itself" have taken on a more decisive role. And, if the division over the oil issue has made this clear, it now remains to be seen how the upward trend in Gulf economic investment in the US will translate over the long term, and how this will influence their political and diplomatic relations.
Americas Coordinator: José Antonio Sierra
