Asian markets prepare for a rocky week


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01-08-2011 08:03 AM


ABC Canberra 666

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ABC Canberra 666


01-08-2011 08:03 AM



01-08-2011 08:43 AM

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2011-08-01 08:03:25

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RYAN, Peter, (journalist)


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Asian markets prepare for a rocky week -

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Markets across Asia are bracing for a volatile week with a deal on America's dead ceiling still
elusive. One of the world's biggest pension funds, Towers Watson, says a likely downgrade of
America's credit rating could put pressure on US interest rates and prompt a new recession.

TONY EASTLEY: Financial markets are bracing for some volatile days ahead regardless of any last
minute deal being struck on the US debt ceiling.

With America now likely to lose its coveted AAA credit rating for at least a short period, a cloud
has been cast over US Treasury bonds which have long been regarded as the world's safest

A downgrade means America will have to pay more for its debt and the additional pain passed on to
consumers could be enough to spark a new recession.

Carl Hess, head of investments at the global pension advisers Towers Watson, spoke from New York
with our business editor Peter Ryan.

CARL HESS: A default, if it happens, and that's quite a big if, is likely to be rather technical
and fairly short-term in nature, but recognising that it could be a rather interesting week. The
situation is volatile. It changes from time to time. Compromises appear and are shorn apart in
tatters fairly quickly, although I think at the present time I'm rather optimistic that a deal
could be on the rather immediate horizon.

PETER RYAN: A ratings downgrade seems likely regardless of any political deal being struck. What
sort of impact would that have on the US economy?

CARL HESS: We're in a fairly perilous position. I'm not sure whether we're going to see an
announcement that we're already slipped into recession, perhaps, you know, three months down the
road in retrospect.

But what we're going to see is increased borrowing cost across every spectrum of the economy.
That's likely, I think, to be a bit of a temporary phenomenon. When Japan was downgraded, you know,
people said this was going to be terrible and yet here we are 10 years later and Japan is actually
borrowing more yields than it ever had to.

But right now the economy is skating on very thin ice. Any additional burdens could tip us into
recession fairly quickly.

PETER RYAN: What is all this doing to the status and security of US Treasury bonds which at the
moment are still the safest investment you can get?

CARL HESS: Where's the better alternative I think is what you have to ask yourself? I mean, over
the long term, you know, there's probably more virtue in the global approach to fix income than
there ever was, but over the short term, you know, it's not as if you can look around the horizon
and find large reputable insurers without some sort of overhang, whether that's, say, the European
banking sector or how China is managing its currency.

It doesn't bode well for the long-term status of the dollar as the sole reserve currency of the
world but I'm not sure we'll have much alternative over the short term.

PETER RYAN: Banks and insurance companies hold US Treasury bonds as part of the safest asset
security. But what sort of chaos would a downgrade or temporary default cause in those debt

CARL HESS: Most have already prepared for such an eventuality. We don't see a great amount of
immediate structural damage done to the financial sector and they'll be able to adjust going
forward. That being said, the financial sector has done a very good job of passing those increased
costs onto the consumer so we could see higher, higher borrowing costs across the economy as a very
immediate impact.

PETER RYAN: It's shaping up as being a fairly rocky period in Asian markets this week as we wait
for a resolution. What's your advice?

CARL HESS: Volatility is likely to be high. I guess the good side of it if you're an optimist is
there'll be buying opportunities. On the other hand, things do fall apart. You might have quote
unquote buying opportunities for a month or more.

TONY EASTLEY: Carl Hess, head of investments at the global pension advisers Towers Watson, with our
business editor Peter Ryan.