How Financial Markets View Fiscal Deal

Transcript

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It's MORNING EDITION from NPR News. I'm Steve Inskeep.

RENEE MONTAGNE, HOST:

And I'm Renee Montagne.

The last-minute move by Congress that reopened the federal government and raised the debt ceiling has brought some relief to the markets. Stocks are mixed in Asia, but some investors are already worrying about the prospects of another fiscal showdown in Washington early next year, saying Congress is merely kicking the can down the road.

Joining us now is Kevin Logan. He is the chief U.S. economist at the banking giant HSBC. Good morning.

KEVIN LOGAN: Good morning.

MONTAGNE: How relieved are investors with the deal that was made, after all, at the 11th hour?

LOGAN: Well, they're quite relieved, particularly investors in the Treasury market. That's where all the risk was, whether or not the U.S. Treasury would actually default or delay payment on some of its obligations. I think away from the Treasury market, it wasn't quite as much an anxiety. We saw that in the stock market, for example. Gains slowed down, but by and large the market held in. And then there was a small relief rally once the deal was struck.

But the big relief, the big change within the Treasury market, were particularly the short-term securities that were due to mature in the next month or so. Those, which had sold off severely, rallied once the deal was made.

MONTAGNE: Well, when you talk about that market - in fact, you are talking about, in a way, the whole world, certainly world leaders were urging the U.S. Congress and the president to make some kind of deal, you know, saying that the U.S. cannot, if it came to that, default on its debt. And China - now China holds something like $1.3 trillion in American public debt. How has this whole thing affected China?

LOGAN: Well, it certainly made them start to think about the safety and security of their international reserve holdings. China has, over the last two decades, been driven by their economic growth, they've been driven by exports to a large extent. They've run current account surpluses that have piled up quite a treasure trove of international reserves. The place they invest most of those are in U.S. government securities, the deepest, most liquid and most easily transacted market in the world. Now they have to think a little bit more about the risk of that market in a way that they hadn't before.

MONTAGNE: Which, of course, would not necessarily be good for the U.S. I mean, China - there was a point at which coming out of China were calls for the international community to move away from the dollar.

LOGAN: Well, yes. Right now we have international monetary arrangements that are based on the relative strength and the quality of the financial markets in different economies. And over time it's shifted. We know that early in the last century it was U.K. with sterling. More recently, the evolution and development of the euro provided a substitute for the dollar and sterling. Things will keep changing over time. Certainly the emergence of China as a strong and potentially dominant economic power will eventually lead to changes in global monetary arrangements. This little episode we've just been through is probably just one more step on the way of making people think about how these changes will take place in the future.

MONTAGNE: Let's get back to regular folks here in the United States. The housing market took a hit momentarily. What do you think this deal will do for that and just largely such things as interest rates?

LOGAN: Well, the main thing is the end of the government shutdown. Housing was bothered by all of this because the processing of loans was slowed down. A lot of loans depend upon FHA approvals or paperwork that might go through to forming the mortgage pools that are backed by Fannie May or Freddie Mac, and all the uncertainty about the government shutdown delayed all of that processing and so held up mortgages that people might get. Hopefully the backlog will be cleared quickly, and the housing market will return to normal.

MONTAGNE: Kevin Logan is chief U.S. economist at HSBC. Thank you very much for joining us.

LOGAN: You're welcome. Transcript provided by NPR, Copyright NPR.