U.S. Treasury Secretary Timothy Geithner, who has taken to the road this week to shore up confidence among some of his country's biggest debt holders, is trying to get their attention by acknowledging that Washington has a “special responsibility” to maintain stability in the global economy.
The unusual public embrace of the United States' perceived role as linchpin of the world economy signals that the Obama administration wants to counter a growing global uneasiness with its fiscal policies. A significant waning of demand for the country's debt could trigger higher interest rates, which would undermine efforts to bring the world's largest economy back to life.
Mr. Geithner's message was amplified by his choice of venue Tuesday: the Jeddah Chamber of Commerce.
Sovereign investors in the Middle East and Asia that have long stored their export wealth in U.S. Treasuries are starting to question the wisdom of that strategy as the U.S. government runs up record debt fighting the recession.
As Mr. Geithner began his tour in London on Monday, the Treasury Department reported that the budget deficit over the first nine months of the fiscal year that started Oct. 1 was $1.1-trillion (U.S.), the biggest shortfall ever.
Figures such as those are causing nations to consider diversifying their portfolios out of concern that the ever-growing supply of U.S. debt risks reducing the value of their holdings. Those same worries are undermining faith in the U.S. dollar, creating volatility that is feeding calls from China and other nations for a global reserve currency.
Mr. Geithner took on both issues in Jeddah, emphasizing that the deficits were necessary to avoid a deeper economic crisis and that President Barack Obama is committed to begin reducing the debt to 3 per cent of gross domestic product as soon as the country is clear of its deepest recession since the Great Depression.
Saudi Arabia is one of the countries in a group of major oil exporters that ranks as the fourth-largest holder of U.S. debt.
To underline his points, Mr. Geithner used his first visit to the Middle East as Treasury Secretary to tell doubters that the U.S. government understands its policies have ramifications on other countries.
Five of the six Arab states that comprise the Gulf Co-operation Council – Saudi Arabia, the United Arab Emirates, Bahrain, Qatar and Oman – peg their currencies to the U.S. dollar. The sixth, Kuwait, bases the value of its currency on a basket that is heavily weighted in dollars.
“Given the dollar's role in the international financial system and the significant impact of the U.S. economy on global economic conditions, we fully recognize that the United States has a special responsibility to play,” Mr. Geithner said in remarks that were posted on the Treasury's website.
“The policies of the United States are designed to lay the conditions for a strong dollar for more stability in the international monetary system and among the major economies,” Mr. Geithner added in response to a question after the speech.
Clay Lowery, a former Treasury official who served under both Democratic and Republican administrations, said he had only heard a secretary make similar comments once – last autumn, when Henry Paulson assured investors around the world that he would protect their holdings of debt issued by the troubled housing agencies Fannie Mae and Freddie Mac.
“Secretary Geithner has to provide some assurance that the U.S. is aware of its debt holders and will be careful,” said Mr. Lowery, a managing director at the Glover Park Group in Washington. “There is concern out there that the U.S. can't get its fiscal house in order.”
Mr. Geithner's road show is scheduled to arrive Wednesday in Abu Dhabi in the UAE and return Thursday to Europe for meetings in Paris.
The Mideast stops are especially crucial because many of those countries are openly considering dropping their pegs to the greenback, which would decrease demand for U.S. debt at a critical time.
“He's singing the praises of the dollar, saying, ‘We are the ones that provide economic security,'” said Bessma Momani, a senior fellow at the Centre for International Governance Innovation in Waterloo, Ont., who studies the Middle East.
“The past year hasn't really proven that.”
With files from Reuters
and Bloomberg News