Asia and Europe react to U.S. debt downgrade

An electronic sign on the floor of the New York Stock Exchange.

Kai Ryssdal: Much as happened last week, today in the markets wasn't just us: Europe and Asia went along for the trouncing as well.

We made our man in Shanghai, Rob Schmitz, stay up past his bedtime to join me and Stephen Beard from London for a chat about the day in the global marketplace.

Stephen, things in Europe didn't start as badly as we'd feared, but they did lose steam by the close?

Stephen Beard: Yes, I mean Europe initially was pretty preoccupied with its own debt problem, and it drew some encouragement from the fact that the European Central Bank announced it was going to buy government bonds. And it was interpreted that this meant Spanish and Italian government bonds, staving off the possibility that Spain and Italy might default anytime soon.

So that gave the Europeans some encouragement, but that feeling didn't last.

Ryssdal: Well Rob Schmitz, you are the Asian markets about which we were talking here all weekend. Remind us what happened and then explain why.

Rob Schmitz: Well the markets didn't go down as much as I think people thought they would. And I think that's primarily because of China. China's the big player in the Asian markets, obviously, and I think everyone knows that it will continue to buy U.S. Treasury bonds, largely because that really remains the only option for it.

Ryssdal: Well, pick up on that for a second, Rob, because -- especially after the government came out this weekend and said, "Hey, you guys better behave yourselves," to the United States -- there are some worries that China's going to stop buying Treasuries or at least diversify its portfolio.

Schmitz: That's definitely an urban myth and it seems to be going around. China is not about to move away from buying U.S. Treasuries, and it's not going to dump them.

Here's why: it will remain the largest foreign holder of U.S. debt -- it owns 15 percent of our debt -- because it has to. It keeps buying U.S. Treasuries because it helps keep China's currency artificially low. And that in turn helps keep China's exports really cheap, and that gives stability to China by keeping people employed. So if it dumped U.S. Treasuries, China's currency would appreciate and inflation would just get worse in China. And the government in Beijing knows that, historically, out-of-control inflation is often synonymous with social unrest.

Ryssdal: Stephen Beard in London, the last time you and I talked about the European debt crisis, we asked you somewhat facetiously if we could be done with European debt crisis stories now because there was this deal to be had. Clearly, no.

Beard: No, indeed. And the European Central Bank wading into the Spanish and Italian bond market today certainly doesn't end the crisis, because nobody believes that the bank is going to be able to buy all of Italy's national debt. There's $2.6 trillion worth of it. So the solution is probably not going to occur until we see even more market mayhem -- even more blood on the carpet.

Ryssdal: Yeah, 'cause that's what we need. Rob, that word that Stephen kept using, "solution." I mean, China was the solution last time around, right? It had this huge stimulus package. It kept the Chinese economy growing through the 2008 recession. Any chance that's going to happen again?

Schmitz: Probably not. This is a real concern, obviously. China doesn't really have a lot of good options like it did three years ago. Three years ago, it spent half a trillion dollars on a stimulus package, and that helped the global financial crisis from getting worse. But it wasn't spent very well. There was hundreds of billions of dollars in bad loans to local governments for really poorly thought out infrastructure projects that really aren't going to be paid back.

One of those now more infamous projects was China's high-speed rail. That was a project that was rushed ahead with tons of stimulus money, but now look at it. We've already seen a terrible crash that's having both an enormous economic but also a sociological effect on the Chinese.

Ryssdal: Stephen, we've been hearing throughout the broadcast today -- we got a bunch of sound from regular people on the street asking them what they're thinking about. If we did the same thing in Europe, what would Europeans be talking about? What would they be expecting now?

Beard: Well I think that this S&P downgrade on this side of the pond has had a big symbolic importance more than anything else. It's a symbol of what's happening throughout the developed industrial world. Governments and households borrowed too much money during the boom. We, the U.S. and Europe, primarily, now face the painful process of paying off those debts, or getting bailed out, or going bust.

Ryssdal: Rob Schmitz in Shanghai, Stephen Beard in London. Thank you, guys.

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