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Bond market crumbling? No, world still hopeful on US debt deal.

Bond market debacle seems unlikely, many foreign officials say. But bond market could see loss of America's Triple A rating if there are no big budget cuts long term.

By Emily KaiserReuters / July 25, 2011

People react in front of an electronic stock board of a securities firm in Tokyo, Japan, July 22, 2011. World stock and bond markets did not panic July 25, 2011, as US lawmakers continued to squabble over raising the debt limit.

Shuji Kajiyama/AP


SINGAPORE – Policymakers worldwide oscillated between hope and confidence on Monday that U.S. lawmakers will break a debt impasse that threatens to trigger a default and up-end global financial markets.

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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 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 in stock or bond markets.

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.

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 spokesman 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 euro zone," British government minister Vince Cable said on Sunday.


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 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," the Indian official said.