Paulson Says Foreign Treasuries Holdings Not Threat

March 4 (Bloomberg) -- Treasury Secretary Henry Paulson said foreign holdings of U.S. government debt pose no threat to the economy, countering comments made by leading Democrats including Senator Hillary Clinton.

``It's a positive that foreign investors want to own our Treasuries,'' Paulson said in an interview with ABC News today. ``Interest rates are lower -- it's helping our economic growth in this country.''

Paulson reiterated that the U.S. economy is ``healthy'' and downplayed last week's slump in stocks, the biggest in four years. Financial markets don't move ``in any direction in a straight line forever,'' he said. ``And so I look at it and put it in perspective and say, over the last year, the Dow's up almost 11 percent, the S&P's up 9 percent, and I'll take it.''

Clinton, a New York senator running for the Democratic nomination for president, said last week the global market sell- off was a ``wake-up call'' for addressing international holdings of Treasuries. Representative Charles Rangel, a New York Democrat who chairs the House Ways and Means Committee, said ``the slide shows that we are vulnerable.''

Treasuries posted their biggest weekly rally since September last week as investors sought a haven from the decline in shares. Yields on benchmark 10-year notes dropped 17 basis points, or 0.17 percentage point, to 4.50 percent. The Dow Jones Industrial Average lost 4.2 percent to close at 12114.10 on March 2. The Standard & Poor's 500 index slumped 4.4 percent to 1387.17.

International Holdings

Investors abroad hold more than half of the $4.3 trillion of debt outstanding. China is the second-largest owner after Japan, with $349.6 billion in December, Treasury data show. The slump in American stocks last week was spurred in part by the biggest slump in Chinese shares in a decade, traders said.

``The move suggests that the money we owe to China is not a healthy thing,'' Rangel said in an interview on Fox television earlier today.

Clinton wrote a letter last week to Paulson and Federal Reserve Chairman Ben S. Bernanke saying the amount of U.S. debt held by investors abroad was a ``source of vulnerability'' for the economy. ``We can too easily be held hostage to the economic decisions being made in Beijing, Shanghai and Tokyo,'' she wrote.

Both Paulson and Bernanke have repeatedly told lawmakers in hearings this year that foreign holdings of Treasuries are a statement of confidence in the American economy.

Paulson, the former head of Goldman Sachs Group Inc., said that the $1 trillion of U.S. debt held by China and Japan amounts to just two days of trading in Treasuries.

Bernanke's View

Bernanke said in a hearing at the House Budget Committee Feb. 28 that it wasn't in the interest of foreigners to dump their Treasuries. A sell-off ``would be disruptive in the debt markets in the short run. It would cause, for example, an increase in interest rates.''

``In the longer term, the effects would be somewhat less,'' Bernanke said. ``It should be noted that the Federal Reserve could be of assistance in that situation if interest rates went up and slowed U.S. economic growth. For example, the Federal Reserve could respond by using monetary policy, and that would have some benefits.''

Paulson today reiterated his view that the U.S. economic outlook is unshaken by the decline in stocks. ``The consumer's strong,'' he said. Exports are ``adding to our growth'' and ``inflation appears to be contained.''

The Treasury chief conducted the interview before his departure for a trip to Japan, South Korea and China. Paulson is seeking to persuade China to reduce its reliance on exports for growth. Lawmakers from both parties say the nation artificially holds down its exchange rate to spur exports and charge China with violating intellectual property rights.

Resist Protectionism

Paulson said that while the U.S. should continue to pressure China, the country should resist protectionism. ``Being open to trade and foreign investment has been one of the pillars -- and competition that's made this economy great.''

In his interview today, Rangel warned that patience was running thin on Capitol Hill with China. ``Congress, Democrats and Republicans are going to start to get tough with China.'' He said that China needed to move more quickly to improve mechanisms to protect intellectual property.