By Laura MacInnis
WASHINGTON, Aug 4 (Reuters) - Data showing foreigners own half the U.S. debt has raised concerns about a possible tipping point for America's reliance on foreign capital, though the U.S. Treasury Department sees little risk from the holdings.
A graph in a Treasury Department report this week on borrowing needs showed foreign holdings made up 50 percent of total privately held U.S. public debt, which excludes Federal Reserve holdings, as of May 31.
Foreign holdings accounted for just 20 percent of U.S. debt in 1993 but they have swelled in recent years as Asian banks loaded up on U.S. Treasuries, seeking to depress their currencies against the dollar to boost exports.
Economists say the influx of offshore capital has helped support the U.S. economy by lowering market interest rates and bridging the country's large budget and trade deficits.
Some, however, see the high foreign holdings level as a vulnerability.
"It shows you the increased dependence of the U.S. on foreign capital. It certainly is a risk factor going forward," said Stefane Marion, assistant chief economist at National Bank Financial.
"It is very difficult to tell at one point we are at the tipping point. But we are getting closer," Marion said.
"You would need to see a significant slowing of U.S. economic growth or a sharp deterioration of the productivity outlook in the U.S. to have a significant run on U.S. assets," he said, adding: "so far, so good."
With the presidential election less than three months away, the high foreign debt level has also bled into politics. Former President Bill Clinton said last week the Bush administration was borrowing from foreign governments, "mostly Japan and China," to bridge its deficit.
"Sure, they're competing with us for good jobs but can we enforce our trade laws against our bankers?," he said in an address to the Democratic National Convention.
BUY AND HOLD
A Treasury-commissioned panel of investment banking executives concluded that foreign buyers are generally "buy-and-hold" investors and unlikely to sell their securities en masse.
"The committee overwhelmingly felt that broad foreign ownership of Treasury securities was beneficial, in that it lowered domestic interest rates," minutes of the Borrowing Advisory Committee meeting released on Wednesday said.
"The idea that foreign investors would rapidly 'dump' bonds is not consistent with historical experience and illogical, since it would be detrimental to foreign holders' markets."
At a media briefing on Wednesday, Treasury's Acting Assistant Secretary for Financial Markets Tim Bitsberger said the United States should be more engaged with foreign buyers.
"In the same way we try to have an open dialogue with market participants domestically, we at Treasury feel we need to have an open dialogue, as much as we possibly can, with the international holders," Bitsberger said.
"We strive to have a broad diversified ownership. What we are trying to do ... is just to make sure to understand their motivations and needs so that the marketplace continues to function as well as it has," he said.
Bitsberger also said the Treasury has encouraged foreign holders to be more active in the repurchase market, which would entail lending notes for short periods to help boost liquidity in the overall debt market.
Stephen Stanley, chief economist at RBS Greenwich Capital Markets, said while the current foreign holdings level is not a problem in and of itself, "you'd like to think it's not going to go too far above 50 (percent)."
However, Stanley did not anticipate a run on Treasuries.
"Obviously there may come a point in time when foreigners are less willing to hold our debt, but it's not like a light switch that gets turned from on to off," he said.
"This happens gradually over time, it happens at different prices ... I don't think there has to be necessarily a single cataclysmic event."
Charles Lieberman, chief economist at Advisors Financial, said the current foreign holdings level had ignited debate over how large the portion could become.
"I don't think it matters if it's at 50 or 45 or 55. But there are are longer-term trends here that are unsustainable," Lieberman said.
"You can't continue to sell your bonds to foreign investors at a higher and higher rate, because at some point they'll own 100 percent. Obviously that's a constraint," he said.