Big creditors China, Japan press U.S. to resolve debt fight

Reuters

By Ben Blanchard and Tetsushi Kajimoto

BEIJING/TOKYO, Oct 8 (Reuters) - Japan's finance ministerpressed the United States on Tuesday to resolve its politicaldeadlock over government finances quickly to avoid a fiscalcrisis that could damage the global economy.

The comment from Taro Aso was the latest sign that Japan andChina - the biggest foreign creditors of the United States - areincreasingly worried that the U.S. government shutdown and thestandoff over the debt ceiling could wreak havoc on theirtrillions of dollars of investments in U.S. Treasury bonds.

"The U.S. must avoid a situation where it cannot pay (forits debt) and its triple-A ranking plunges all of a sudden," Asotold reporters following a cabinet meeting.

"The U.S. must be fully aware that if that happens, the U.S.would fall into fiscal crisis," he said.

Japan's Nikkei financial daily, citing unidentified sources,reported that Japanese officials held several emergencytelephone conferences with U.S. Treasury officials on Monday.

However, a senior Japanese government official shrugged offthe report, suggesting instead that the subject had beendiscussed only as part of regular contact between the twocountries. Similarly, a U.S. Treasury official said the Treasuryhad no knowledge of emergency calls.

On Monday, Chinese Vice Finance Minister Zhu Guangyao saidBeijing had been in touch with Washington over the standoff, inwhich Republicans in the House of Representatives have refusedto increase the $16.7 trillion debt ceiling as they seek changesin President Barack Obama's signature healthcare law.

The U.S. Treasury has said it would hit the debt ceiling byOct. 17, at which time it would have only around $30 billion andincoming revenues to pay the government's bills, leaving thenation on the edge of default unless Congress raises the cap.

The political standoff is in its second week, with much ofthe U.S. federal government closed and no signs of abreakthrough, although some glimmers of hope emerged on Mondayas Obama said he would accept a short-term increase in thenation's borrowing authority to avoid a default.

TRILLIONS AT STAKE

As of July 31, China held $1.28 trillion in U.S. Treasurybonds and Japan held $1.14 trillion, Treasury Department datashows.

The last big confrontation over the debt ceiling, in August2011, ended with an 11th-hour agreement under pressure fromshaken markets and warnings of an economic catastrophe if adefault were allowed to happen.

China is "naturally concerned about developments in the U.S.fiscal cliff," Zhu told reporters, saying it was Washington's"responsibility" to avoid a debt crisis and ensure the safety ofChinese investments.

But IMF Chief Economist Olivier Blanchard told reporters inWashington that a U.S. debt default, while affecting China'sportfolio of bonds, would not have any major implications forthe Chinese economy. He spoke about China while presenting theIMF's latest snapshot of the global economy.

Japan has previously expressed its concerns in diplomaticterms. Aso and Chief Cabinet Secretary Yoshihide Suga both saidlast week that the fiscal standoff was essentially a U.S.domestic problem.

But Aso added that the shutdown could push up the yenagainst the dollar - a concern for Japan's export-relianteconomy, which has benefited from a decline in the yen sincePrime Minister Shinzo Abe won election in December on areflationist policy platform.

Should the United States default on its debt, "there wouldbe a large international impact," Aso said last week. "If thereis no prompt resolution, various impacts will emerge."

The yen has been rising this month as investors shed riskand seek the perceived safe haven of the Japanese currency. Thedollar slipped on Tuesday to a two-month low of 96.55 yen in Asia trade but it moved higher later in the day.

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