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.
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Australian Treasurer Wayne Swan said a protracted debt ceiling debate added uncertainty to the global economy.Skip to next paragraph
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"With the global recovery and confidence still fragile, it's in everyone's interests that U.S. policymakers work towards a speedy resolution," Swan said in an email to Reuters.
Congress has set the U.S. 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 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 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 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 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. No other market in the world is deep enough to absorb that size of investment.
"People will see that as a safer alternative," said Mobius, whose group manages $50 billion. "You are already beginning to see that trend."
(Additional reporting by Yoo Choonsik in Seoul, Saeed Azhar in Singapore, Kaori Kaneko and Tetsushi Kajimoto in Tokyo, Kevin Yao in Beijing, Andrew Quinn in Hong Kong, Abhijit Neogy in Delhi and Rob Taylor in Canberra: Editing by Mike Peacock)