* U.S. is "playing with fire", Chinese official says
* Chinese officials say increased risk of U.S. debt default
* Indian officials say they doubt U.S. would allow default
* "Horrible idea," says economist
* Oman central bank concerned about reserves impact,
(Adds quote from PBOC adviser, Oman comments, market reaction)
By Emily Kaiser
SINGAPORE, June 8 U.S. Republican lawmakers are
"playing with fire" by contemplating even a brief debt default
as a means to force deeper government spending cuts, an adviser
to China's central bank said on Wednesday.
The idea of a technical default -- essentially delaying
interest payments for a few days -- has gained backing from a
growing number of mainstream Republicans who see it as a price
worth paying if it forces the White House to slash spending,
Reuters reported on Tuesday. [ID:nN07154296]
But any form of default could destabilize the global economy
and sour already tense relations with big U.S. creditors such as
China, government officials and investors warn.
Li Daokui, an adviser to the People's Bank of China, said a
default could undermine the U.S. dollar, and Beijing needed to
dissuade Washington from pursuing this course of action.
"I think there is a risk that the U.S. debt default may
happen," Li told reporters on the sidelines of a forum in
Beijing. "The result will be very serious and I really hope that
they would stop playing with fire."
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
"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
Republicans flirt with brief default [ID:nN07154296]
Bond traders to sweat out debt fight [ID:nN07147833]
PBOC adviser on default threat [ID:nL3E7H81ME]
China official on U.S. dollar policy [ID:nL3E7H71AA]
The U.S. Congress has balked at increasing a statutory limit
on government spending as lawmakers argue over how to curb a
deficit which is projected to reach $1.4 trillion this fiscal
year. The U.S. Treasury Department has said it will run out of
borrowing room by Aug. 2.
If the United States cannot make interest payments on its
debt, the Obama administration has warned of "catastrophic"
consequences that could push the still-fragile economy back into
"It has dire implications for the economy at a time when the
macro data is softening," said Ben Westmore, a commodities
economist at National Australia Bank.
"It's just a horrible idea," he said.
Financial markets are following the U.S. debate but see
little risk of a default.
U.S. Treasury prices were firm in Europe on Wednesday,
supported by a flight to their perceived safety on the back of
the Greek debt crisis and worries about a slowdown in U.S.
economic growth. [ID:nLDE75717D]
Marc Ostwald, a strategist with Monument Securities in
London, said 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 Republicans' theory is that bondholders would accept a
brief delay in interest payments if it meant Washington finally
addressed its long-term fiscal problems, putting the country in
a stronger position to meet its debt obligations later on.
But interviews with government officials and investors show
they consider a default such a grim -- and remote -- possibility
that it was nearly impossible to imagine.
"How can the U.S. be allowed to default?" said an official
at India's central bank. "We don't think this 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.
The officials declined to be identified because they are not
authorised to speak to the media.
Oman is concerned about the impact of a default on the
currency reserves of the sultanate and its Gulf neighbours.
"Our economies are substantially tied up with the U.S.
financial developments," said a senior central bank official,
who spoke on condition of anonymity. [ID:nLDE75715O]
"It just wouldn't happen," said Barry Evans, who oversees
$83 billion in fixed income assets at Manulife Asset Management.
"They would pay their Treasury bills first instead of other
bills. It's as simple as that."
Monument's Ostwald called the default scenario "frightening"
and said bondholders' patience would wear thin if lawmakers
persisted in pitching this strategy in the coming weeks.
"This isn't a debate, this is like a Mexican standoff and
that is where the problem lies," he said.
Yuan Gangming, a researcher with the Chinese Academy of
Social Sciences, a government think tank, smelled some political
wrangling behind the U.S. debt debate as the 2012 presidential
election draws nearer and said Republicans "want to make things
difficult for Obama."
But with time running short before the U.S. Treasury
exhausts its borrowing room, Yuan said default was a real risk.
"The possibility is quite high to see a default of the U.S.
debt, which would harm many countries in the world, and China in
particular," he said.
(Reporting by Kevin Lim and Jong Woo Cheon in Singapore,
Suvashree Dey Choudhury in Mumbai, Aileen Wang and Kevin Yao in
Beijing, Abhijit Neogy in Delhi, Marius Zaharia in London and
Umesh Desai in Hong Kong; Editing by Dean Yates and Neil