US-centric media are reporting that Japan has become the biggest holder of the US treasuries, surpassing China last month. However, this is true only in regard to single countries. If we consider the European Union member states collectively, then they appear to be the biggest holder of the US treasuries. It has been so almost one year long. Unfortunately, the EU’s holdings are artificially overstated because of some financial havens and they are going in the opposite direction to the trend: up rather than down.
According to the latest data from TIC (Treasury International Capital System), the EU was in possession of $1242 billion of US Treasuries in November 2016, $9 billion more than one month earlier. The EU was the only one from three biggest holders that increased its amount of US treasuries in November, while China and Japan continued to lower their holdings.
The EU became the top US Treasury holder in February 2016, i.e. one year ago. China’s holdings were then $1252 billion, while in November 2016 they were down to $1049 billion, which was a 16% decrease. If this pace of the Chinese sell-off is to be maintained, China may be surpassed even by the Euro Area, which is already holding $922 billion.
However, there is nothing to be proud of. While the global tendency is for countries to get rid of US government securities, European states like Ireland and Luxembourg are still buying them. As ZeroHedge points out, in November all foreign holders of US Treasuries combined sold $70.8 billion, the most in one month ever, bringing their total holdings down to 3.771 trillion, far below the $4.117 trillion held one year ago. The tendency is clear since the end of 2015 and Europe is going upstream.
The problem is caused by such financial hubs as Ireland, Luxembourg, and the United Kingdom (Ireland is the third single holder of US Treasury, just above another estimable tax haven: Cayman Islands). These three make up about 57% of the entire EU holdings, while only the UK is a big economy. During the next weeks the Gefira team will publish more on this topic trying to explain how it is possible that the Irish or Luxembourgers possess three times as many US papers as Germans, who have $86 billion (exactly the same amount is held by Russia).
We also recommend our latest edition of the Gefira Anticipation Bulletin where we show why such a big exposition of US Treasury is dangerous to the financial stability of Europe, especially in the context of Chinese economic troubles and enormous derivatives position of the biggest banks including European financial institutions such as Deutsche Bank.