Singapore - Policymakers worldwide oscillated between hope
and confidence on Monday that US lawmakers will break a debt impasse that
threatens to trigger a default and up-end global financial markets.
Asia, which holds close to $3 trillion in US government
debt, has a powerful vested interest in Washington finding a workable
compromise. Policymakers and economists expected lawmakers would strike a
last-minute deal to avert a crisis.
The political brinkmanship hit world stocks on Monday and
pushed money into safe haven gold and Swiss francs, ending a brief relief rally
over Greece’s second bailout package, although there was no sign of panic.
But with just eight days left before August 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.
Fresh from pulling together a new bailout of debt-ridden
Greece, Berlin also expected Washington would raise its debt limit.
“We have ... followed the debate in America with great interest and we continue to remain confident that a compromise can be reached,” German government spokesperson Christoph Steegmans told a news conference.
Others were less sanguine, and much blunter.
“The irony of the situation at the moment ... is that the
biggest threat to the world financial system comes from a few right-wing nutters
in the American Congress rather than the eurozone,” British government minister
Vince Cable said on Sunday.
Political, not economic rift
Asian sources said finding a solution was primarily a matter
of mustering political will rather than securing rescue funding, which can be
far more complicated, as Greece’s crisis has shown.
“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 US 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,” the Indian official said.
Australian Treasurer Wayne Swan said a protracted debt
ceiling debate added uncertainty to the global economy.
“With the global recovery and confidence still fragile, it’s
in everyone’s interests that US policymakers work towards a speedy resolution,”
Swan said in an email to Reuters.
Congress has set the US government’s borrowing limit at
$14.3 trillion, but the Treasury has already tapped that amount and needs more
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 US government but also for other countries, companies and consumers
because US Treasuries are the benchmark by which many loans are measured.
US Secretary of State Hillary Clinton, speaking in Hong
Kong, said she believed Congress would secure a debt deal and “work with
President Obama to take steps to improve our long-term fiscal outlook”.
Where to invest?
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 US Treasury may have a bit of wiggle
room on the August 2 deadline because tax revenues had exceeded expectations. But
that would buy days, not weeks.
For Asian policymakers, there is no alternative to investing
in US Treasuries. China and Japan are by far the world’s biggest foreign
owners, with more than $2 trillion in Treasuries combined. No other market in
the world is deep enough to absorb that size of investment.
Mark Mobius, executive chairperson of Templeton Asset
Management’s emerging markets group, said more money might flow into Asian
currencies and bonds if US debt talks fail.