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.
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.
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.
POLITICAL NOT ECONOMIC RIFT
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.
Australian Treasurer Wayne Swan said a protracted debt ceiling debate added uncertainty to the global economy.
"With the global recovery and confidence still fragile, it's in everyone's interests that U.S. policymakers work toward 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 authorize 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 Barack 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 finalized six months later.
"The base case scenario can be summarized 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, N.J., 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.
Mark Mobius, executive chairman of Templeton Asset Management's emerging markets group, said more money might flow into Asian currencies and bonds if U.S. debt talks fail.
"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)