Asia watches and hopes U.S. will avoid debt ‘suicide’

Bewildered Asian officials could only watch and hope for the best on Monday after U.S. lawmakers failed to break a debt impasse that threatens to trigger a default and up-end global financial markets.

 Asia, which holds close to $3 trillion in U.S. government debt, has a powerful vested interest in Washington finding a workable compromise. Policymakers and economists contacted by Reuters were confident that lawmakers would strike a last-minute deal to avert a crisis.

 Investors in Asia took a defensive stance, although there was no evidence of the sort of panic selling that some politicians in Washington had feared. Stocks slipped while the Swiss franc rose and gold hit a record high.

  But with just eight days left before Aug. 2, when the Treasury Department has estimated it will run short of money to pay all of its bills, the worry level was rising.

 “Those in direct charge of reserves operations must be more nervous than before, but nobody thinks Americans will choose suicide when they have known solutions,” said a senior official at the Bank of Korea, who spoke on condition of anonymity because he was not authorised to speak to the news media.

 Japanese Finance Minister Yoshihiko Noda, when asked about the breakdown in the U.S. debt talks, said only: “I will be watching the situation.”

  Asian sources said the U.S. debt troubles were primarily political, not economic. Finding a solution was a matter of mustering political will rather than securing rescue funding, which can be far more complicated, as Greece’s recent difficulties showed.

 “They will definitely reach a compromise,” said Xia Bin, an academic adviser to the People’s Bank of China. “Don’t worry too much about it.”

 China is the largest foreign owner of U.S. government debt, with $1.16 trillion as of May, so a vote of confidence from Beijing carries significant weight.

 A senior Indian government official said the Obama administration and lawmakers must be well aware of the consequences for global markets of failing to reach a deal.

 “If you look at the world markets, they are jittery though they have not nose-dived, perhaps reflecting hope of a solution,” the Indian official said.

 Australian Treasurer Wayne Swan said a protracted debt ceiling debate adds uncertainty to the global economy.

 “With the global recovery and confidence still fragile, it’s in everyone’s interests that U.S. policymakers work towards a speedy resolution of these issues,” Swan said in an email to Reuters.

 Congress has set the U.S. government’s borrowing limit at $14.3 trillion, but Treasury has already tapped that amount and needs more money to meet its obligations. Republicans want an agreement on spending cuts before they authorise more borrowing.

 Democrats want to see a mix of lower spending and higher taxes.

 Ratings agencies have warned that even if Congress raises the debt ceiling and averts a default, they may still strip the United States of its AAA credit rating, the highest possible, if lawmakers fail to agree on deeper long-term budget cuts.

 A lower credit rating could raise borrowing costs not only for the U.S. government but also for other countries, companies and consumers because U.S. Treasuries are the benchmark by which many loans are measured.

 U.S. Secretary of State Hillary Clinton, speaking in Hong Kong, said she was confident Congress would secure a debt deal and “work with President Obama to take steps to improve our long-term fiscal outlook.”

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 Ethan Harris, co-head of global economic research at Bank of America-Merrill Lynch, said he expected a temporary increase in the debt ceiling with the promise of up to $4 trillion in deficit reductions to be finalised six months later.

 “The base case scenario can be summarised as ‘appease and delay’ -- appease the rating agencies and the market with the beginnings of a large plan, but in actuality delay the crisis further into the future,” Harris said.

 Robert Tipp, chief investment strategist at Prudential Fixed

Income in Newark, New Jersey, said the U.S. Treasury may have a bit of wiggle room on the Aug. 2 deadline because tax revenues had exceeded expectations. But that would buy a few days, not weeks.

 For Asian policymakers, there is no alternative to investing in U.S. Treasuries. China and Japan are by far the world’s biggest foreign owners with more than $2 trillion in Treasuries combined, and no other market in the world is deep enough to absorb that size of investment.

 Taiwan, Thailand, Singapore, India and South Korea all rank among the major holders of U.S. debt as well, a legacy of the Asian debt crises of the late 1990s.

 Many countries in the region have built up vast reserves as a form of self-insurance so that they would never again have to go hat-in-hand to the International Monetary Fund.