U.S. Debt Ceiling Fight Worries Creditors in India, China

The possibility of a U.S. debt default is causing concerns within financial circles in Asian powers China and India, and officials warn that this may erode the world’s confidence in the robustness of the U.S. economy.

Indians are divided over the possibility and the implications of the likely debt default. In response to a related news item in one of India’s leading financial dailies, The Economic Times, a reader questions the approach being pondered over by U.S. congressmen saying that a technical default will lead the economy into a rut and will not cure the root cause.

Where one reader believes that the U.S. will not default because it will slow down development the world over, and will pave way for China to be a superpower, another opines that the U.S., in fact, should default and “demonstrate the real situation [regarding the economy].” Yet another says, “The Fed has ruined a great nation. There is no way they can pay this debt back as their earnings are less than the accrued interest.”

An official at India’s central bank, who spoke on the condition of anonymity, was quoted by Reuters as saying, “We don’t think [debt default] is a possibility because this could then create huge panic globally.”

Indian officials say they have little choice but to buy U.S. Treasury debt because it is still among the world’s safest and most liquid investments. It held $39.8 billion in U.S. Treasuries as of March, U.S. data shows.

In Washington, Vice President Joe Biden on Thursday held a closed-door meeting with congressional negotiators on the nation’s debt limit.

Despite the vice president’s efforts, both Democrats and Republicans are “dug in over their views about the best course of action. Democrats believe cutting jobs in a weak economy may be unwise; Republicans argue spending cuts and deficit control are the key to economic growth,” according to The Los Angeles Times.

The meeting comes after news broke out this week that a growing number of mainstream Republicans had agreed to a possible technical debt default, i.e., delaying of interest payments for a few days.

Li Daokui, adviser to the People’s Bank of China, said a default could undermine the U.S. dollar, and Washington needs to be dissuaded from pursuing this course of action.

“The result [of a possible U.S. debt default] will be very serious and I really hope that they would stop playing with fire,” Li said, according to Reuters.

“I really worry about the risks of a U.S. debt default, which I think may lead to a decline in the dollar’s value,” Li was quoted as saying.

China is the largest foreign creditor to the United States, holding more than $1 trillion in Treasury debt as of March, U.S. data shows, so its concerns carry considerable weight in Washington.

Whether it is a lack of choice or a still-lingering trust in American economy, the world hopes that the U.S. will find a way to avoid pushing it into another huge global crisis.

Marc Ostwald, a strategist with Monument Securities in London, was quoted by Reuters as saying that markets were working on the assumption that the U.S. debt story “will go away.” But nervousness would grow if a resolution was not reached in the next five to six weeks.

The stalemate reported after the Thursday meeting led by the vice president will not allay the growing fears of financial markets in Asia and the rest of the world.

President Barack Obama has been seeking to win congressional approval to raise the nation’s debt ceiling before an Aug. 2 deadline. Meanwhile, Republican lawmakers are pressing for major spending cuts by the government and see minor delays as a strategy to force the federal government to do exactly that.