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Chile concerned by U.S. debt deadline; no bond sale plans

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(Globalpost/GlobalPost)

By Daniel Bases

NEW YORK (Reuters) - Chile has no plans to sell sovereign debt in the international markets this year, Finance Minister Felipe Larrain said on Tuesday, citing little need for the cash and the unfavorable rise in benchmark U.S. Treasury yields.

"We really don't need the money, and I don't think we can do better than what we got in 2012," he said.

Larrain was referring to the $750 million, 10-year bond Chile sold in October 2012, which priced with a yield of 2.379 percent, putting it just 55 basis points over benchmark 10-year U.S. Treasuries.

Currently the 10-year U.S. Treasury is trading with a yield of 2.64 percent.

"The spread would certainly be above 3 (percent) if we came to the markets right now," he said, noting how the deadline for raising the U.S. debt ceiling and the possible unwinding of U.S. monetary stimulus had raised interest rates globally.

The U.S. government has been partially shut down since October 1 as Democrats and Republicans failed to agree on a budget and spending measures. This is concurrent to the looming deadline of October 17 when the government is set to run out of cash, endangering its ability to pay its debt.

Larrain called the implications of a default on U.S. Treasury debt "unthinkable" and said he hopes reason will prevail.

"It is probably the gravest concern of the world economy," Larrain said after a speech to the Americas Society in New York.

Otherwise he said the global economy could face a situation where the dollar doesn't just fall but plummets and interest rates don't just rise, they skyrocket.

"It could really kill the recovery in the U.S."

CONCERNS

Larrain is heading to Washington for what could be his last appearance at the International Monetary Fund and World Bank meetings as finance minister before November elections.

He arrives with Chile holding the highest credit ratings in Latin America, on par with those of many developed nations. Larrain said Chile is at the doorstep of being a developed nation, but "we are not there yet."

Larrain said he met with one ratings agency recently as part of a review of the sovereign credit but declined to name it.

If there were a U.S. default, Larrain said that Chile, which is the world's largest copper producer, would feel the impact most from a drop in demand for commodities.

Concerned by the sluggishness in the global economy, he reiterated that Chile's economy was decelerating and that he expects growth of 4.5 percent in 2013. Larrain highlighted the slowing growth rate in China and the fragile state of Europe's economy, which is just emerging from recession.

According to Chile's central bank, 23.3 percent of the country's exports went to China, 18 percent to Europe, and 12.2 percent to the United States.

Earlier, Chile's central bank president, Rodrigo Vergara, said the shutdown and debt ceiling deadline are a "significant concern.

Another concern, Larrain said, was the tapering of the U.S. Federal Reserve's $85 billion in monthly purchases of U.S. Treasuries and mortgage-backed securities.

The buying keeps interest rates low and much of the excess cash was recycled into higher yielding emerging markets. But in May, Fed Chairman Ben Bernanke first hinted at reducing the level of bond buying and sparked a global market sell-off.

"I don't think it is clear to the people who are in charge of this how they will do it and what the effects will be," Larrain said of the eventual reduction of Fed bond buying.

The impasse in Washington has prompted both China and Japan - the biggest foreign creditors of the United States - to press for a resolution and avoid potentially wreaking havoc on their trillions of dollars of investments in U.S. Treasuries.

Larrain, a former economics professor at Harvard University, said he believed the financial markets have not panicked as of yet "probably because everyone believes that at the very end they will reach an agreement."

If the U.S. government does not increase its $16.7 trillion borrowing limit, it will not be able to issue debt to pay its bills, leading to a possible default.

In the strictest terms a default is not called until a payment on either interest or principal is missed, which means a default would not occur until some time after October 17.

"I will feel it's bad to pass that threshold ... this economy shouldn't be on the brink every so often," Larrain said.

(Reporting by Daniel Bases; Additional reporting by Anthony Esposito in Santiago; Editing by Paul Simao and Steve Orlofsky)

http://www.globalpost.com/dispatch/news/thomson-reuters/131008/chile-says-it-has-no-plans-sell-debt-2013