Who Owns U.S. Debt?
By now we all know that the U.S. is deeply in debt (NYSE:TLT), and could face default on those debts if lawmakers are unable to reach a decision to raise the debt ceiling by the U.S. Treasury’s August 2 deadline. But from whom have we borrowed the trillions of dollars that make up our nation’s deficit, what will happen if we default, and how will global markets be affected?
Here’s the breakdown:
The government sells securities to other countries as a means of borrowing money. When those bonds devalue as the result of U.S. economic issues, it hurts any country that has invested in the U.S., in turn hurting any country that has invested in any country that has invested in the U.S., and so on.
The U.S. currently owes over $14 trillion, of which $4.5 trillion is owed to overseas investors. China (NYSE:FXI) is by far the biggest owner of treasury bonds, with $1.1 trillion as of this past April. Japan (NYSE:EWJ) comes in second with $907 billion in bonds, and the U.K. (NYSE:EWU) follows in third with $333 billion, with most of that investment coming from private investors and pension funds rather than the government. In fourth place are oil exporters, owning $222 billion of U.S. debt. Brazil (NYSE:EWZ), Hong Kong, Taiwan, Russia, Switzerland (NYSE:EWL) and Canada (NYSE:EWC) all hold significant shares in our debt as well.
Even if lawmakers get their act together and manage to prevent the government from defaulting on its debt, that’s no guarantee ratings agencies won’t downgrade our AAA credit rating, which would raise borrowing costs for the U.S. just as it’s preparing to take on more debt. It could also force money managers who are contractually restricted to AAA-rated investments (NYSE:TLT) to dump their Treasuries, driving down prices and hurting global financial markets.