Stuart Gulliver, HSBC's chief executive, yesterday welcomed the deal to raise America's debt ceiling but warned that the US was still at risk of a downgrade from credit ratings agencies.
As he unveiled a first-half group profit boosted by a 23-per-cent jump in North American profits, the bank's chief executive said the proposed debt agreement should "restore some confidence" to the markets, preventing a default that would have been hugely destabilising to a global economy already reeling from the European debt crisis.
"However, I'm not sure we won't still see a downgrade, which is still quite possible," Mr Gulliver said, adding that he was "uncertain what impact that would have on central banks".
According to their current mandates, central banks can hold only AAA-rated bonds and would theoretically be required to dump US Treasuries in the event of a downgrade. However, economists doubt this would hapen because such widespread selling of Treasuries would further reduce their value and add to the sense of panic in the markets. Furthermore, as Mr Gulliver pointed out, there would still be no viable alternative to the dollar. "On a secular basis the US dollar will continue to weaken, but on a cyclical basis there is no alternative. The eurozone crisis has parked the dollar for a while," he said, predicting that in 10 to 15 years' time the world will have three reserve currencies – the dollar, the euro and the Chinese yuan.
US markets bounced yesterday morning on optimism that a deal will be done to raise America's debt ceiling. However, the Dow Jones was down 1 per cent in afternoon trading after disappointing manufacturing data for July dragged down sentiment.