- CHICAGO (Reuters) -- The
widening U.S. budget gap, already a burden on the dollar, may grow heavier
due to the cost of the open-ended U.S. involvement in Iraq that could end
up costing $200 billion over the next decade, analysts said.
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- To the extent that the United States is likely to pay
most of those security and rebuilding costs in Iraq, issuing debt will
become even more critical to fill the yawning U.S. budget gap, fast approaching
5 percent of gross domestic product.
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- "I think that in the bigger picture ... the cost
of rebuilding Iraq deals directly with the state of the U.S. fiscal deficit,"
said Alex Beuzelin, foreign exchange market analyst at Ruesch International
in Washington D.C.
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- "This is only going to put great strain on the U.S.
budget deficit going forward. That will ultimately have a negative impact
on the economy and the dollar," Alex Beuzelin, the foreign exchange
market analyst, said.
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- The more the United States relies on issuing debt to
fund its budget deficit, the cheaper Treasuries risk becoming and the greater
the risk that foreign buyers shun U.S. debt in favor of some other security
that better holds its value.
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- "The risk is that foreigners start to fret that
the U.S. is living well beyond its means," said Jay Bryson, global
economist at Wachovia Securities. "At some point the rest of the world
is not going to lend the United states money. If you're an investor then
you're going to start thinking in those sort of terms."
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- The problem, if one were to emerge, centers on Asian
central banks which now hold a colossal amount of U.S. debt equivalent
to 10 percent of U.S. GDP. Should they reach the conclusion there are better
places to invest than the United States, a huge factor holding up the dollar
could collapse.
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- BIG RISKS, BUT NO PROBLEM -- YET
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- The huge caveat is that Japan's and China's foreign central
banks are holding dollar-denominated U.S. Treasuries to prop up the dollar
and keep the yen and the Chinese yuan lower, all in the name of buttressing
their respective export sectors.
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- Because the risks of a surge in the yen and yuan present
such a threat to the competitiveness of Chinese and Japanese exporters,
these nations might ultimately shy away from liquidating a big chunk of
their Treasury holdings.
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- In other words, given Chinese and Japanese motivations,
worries about the dollar's vulnerability may be overblown.
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- Still the magnitude of the potentially dollar-negative
variables in play -- from the unpredictable, but no doubt huge costs in
Iraq; to the growing budget deficit; to the staggering size of central
bank Treasury holdings -- make it difficult for some analysts not to get
worked up about risks to the dollar.
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- The U.S. government racked up a record budget shortfall
of $374.22 billion in fiscal 2003 and the Congressional Budget Office is
forecasting the gap to soar to $480 billion in 2004. Those levels are not
only outright records, but are, as a percentage of GDP, now beginning to
hold a candle to the huge deficits during the Reagan years.
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- Also, the Federal Reserve said last Thursday that as
of Nov. 5 holdings of Treasuries and agencies for foreign central banks
as of Nov. 5 rose $5.71 billion from the prior week to $1.003 trillion
-- the equivalent of about 10 percent of U.S. gross domestic product. That
is up from $807.60 billion a year ago.
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- IRAQ ALBATROSS?
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- The United States has not set a target for how much money
it needs to rebuild Iraq after the U.S-led invasion that toppled Saddam
Hussein earlier this year.
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- But estimates from the non-partisan Congressional Budget
Office put the price tag of occupation between $85 billion and $200 billion
over the next decade.
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- Washington has been asking foreign nations to help foot
the bill. Last month in Madrid, international donors pledged at least $33
billion in aid and loans over the next four years to help the war-ravaged
country, money that will help lighten the load on the United States.
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- While the U.S.-led Coalition Provisional Authority cheered
the donations, some market economists said the United States still faced
a huge burden without more contributions.
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- "It's interesting because (some foreign nations)
have a lack of willingness to chip in directly," said Marcel Kasumovich,
head of G10 foreign exchange strategy with Merrill Lynch in New York. "The
direct cost of the rebuilding effort is probably understated to some degree."
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- Some of the countries that opposed the war on Iraq have
been reluctant to donate, Kasumovich said, noting also that much of the
pledged aid will be in the form of loans and investments, rather than direct
grants.
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- Although some analysts cautioned against predicting short-term
dollar weakness based on the Iraq bill -- especially given recent signs
of strong U.S. economic growth which should boost revenues to the government
-- the longer-term costs pose a real threat to the dollar.
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- http://www.reuters.com/newsArticle.jhtml?type=reutersEdge&storyID=3807818
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