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Saudi Bank Warning: U.S. Debt Ratio Same As Italy’s

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ABU DHABI — Saudi Arabia has warned the financial community of a decline of the U.S. dollar.

Saudi Arabia’s National Commercial Bank said the debt burden of the United States has reached the same ratio of Italy, deemed a default risk. In a report, the Jedda-based bank warned that the downgrade of the U.S. credit rating from triple A status would reduce energy demand and prices, a move expected to harm the Saudi kingdom.

“Foreign central banks maintain a large share of their foreign currencyreserv es in U.S. treasuries because it is the deepest and most liquid bond market,” the report said. “But, international funds that limit their investments to AAA-rated bonds may dump the U.S. holdings, causing the U.S. dollar to depreciate. Yet, mutual fund investment guidelines do retain some flexibility regarding the handling of such matters.”

The report, titled “The Standard and Poor’s Downgrade of U.S. and Its Implications on the Saudi Economy,” however, said the Gulf Cooperation Council state could withstand the decline of the U.S. dollar. NCB said Saudi Arabia wielded a large reserve to ensure government programs over the next few years.

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After Fiscal Cliff Comes Fiscal Avalanche, Rejection of U.S. Debt

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While Washington is preoccupied with the so-called fiscal cliff, little attention has been given to the fiscal avalanche that will occur if we continue down an unsustainable, long-term path, causing markets to turn sour on U.S. debt and leading to a spike in interest rates.

Such a eurolike crisis would make the fiscal cliff look like a dip in the road. Unlike driving off a cliff, which you can see coming and make last-minute adjustments to avert, we cannot predict with any reasonable certainty when the avalanche will break. If it does, there will be little anyone can do to prevent its devastating effects.

No one knows just how long the United States can continue to accrue massive debts before lenders lose confidence. Delaying significant fiscal restraint for yet another year will send the wrong signal to financial markets and may serve as a tipping point that could lead to disastrous consequences for our economy.

If U.S. creditors decide that our debt is no longer the safest form of investment available, demand for Treasurys will drop, interest rates will rise and the cost of servicing our debt will begin to explode. Paying interest on our national debt will quickly crowd out spending on almost all other federal priorities. At that point, any deficit reduction undertaken by Washington — including the sorts of spending cuts or tax increases being discussed today — will be too little, too late.

The Congressional Budget Office projects that under the most likely policy scenario, in 30 years, net interest payments on the debt could total $3.8 trillion in today’s dollars. That is more than total government spending for 2011.

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