Asia welcomes US debt deal
An 11th-hour deal to resolve the US debt crisis may avert the superpower's first-ever default and restore some confidence in the dollar, but its second-biggest lender fretted on Monday that Washington had not done enough to avert a credit downgrade.
Japan, second to China as America's biggest lender, joined other countries and investors in welcoming the deal but said it hoped the United States would take additional steps to stabilise its finances and head off the threat of a downgrade.
"If you look at the currency market, we're not seeing a rapid decline in the yen as a result," Deputy Finance Minister Fumihiko Igarashi said of the deal, which buoyed the dollar and share markets but left many investors and economists relieved but unimpressed and also left Washington's political credibility under question.
"Part of the reason why is there is still concern about a US sovereign downgrade. It is my hope and request that US authorities continue to make efforts to stabilise their public finances."
Governments and policymakers had warned Washington of the risk of financial disaster if it failed to raise the $14.3 trillion US debt ceiling. An official Chinese newspaper had called US handling of the crisis irresponsible and immoral.
The agreement between the White House and Democrat and Republican leaders still needs to be endorsed by Congress by Tuesday to allow the debt ceiling to be lifted in time to avoid default or a seizure of government finances.
Even then the proposed spending cuts of $2.4 trillion over a decade may not be enough to forestall a downgrade in the country's prized triple-A credit rating.
"Raising the debt ceiling has prevented a default. But the plan still fails to credibly address future budget deficits and prevent a likely downgrade," said Chua Hak Bin, an economist at Bank of America-Merrill Lynch based in Singapore.
Rating agencies had yet to react to the news. Asia, which holds close to $3 trillion in US government debt, has a powerful vested interest in Washington finding a solution to avoid default or downgrades.
Still, so vast are the sums that Asian governments have invested in Treasuries they have little choice but to grin and bear it.
"A ratings cut, say to AA, would not in itself cause a big problem for existing holders including central banks and sovereign wealth funds as there is no perfect alternative (to replace US Treasury bonds)," said Hong Taeg-ki, head of the Bank of Korea's foreign exchange reserve management group.
The dollar rebounded against safe-haven currencies such as the yen and Swiss franc, and share markets rallied on news of the deal. Gold, a safe-haven asset that had climbed to record highs on fears of stalemate on Capitol Hill, fell back of the deal.
Australian Treasurer Wayne Swan called the deal an key first step but warned it was too early to pop champagne corks.
"It will be a long and painful adjustment for the United States," said Swan. "We've got to see a pathway for fiscal consolidation in the United States and we need that for global certainty. We need that for global growth. A lot of people are going to be watching."
Economists noted the agreement called for just under $1 trillion in initial cuts, with a joint committee charged with finding another $1.5 trillion -- a task which, given the poisonous state of US politics, seemed to promise yet more uncertainty.
"I am not sure this will be enough to remove the negative outlook," said Annette Beacher, head of Asia-Pacific research for TD Securities in Sydney.
Markets are waiting for rating agencies to hand down their verdicts on the deal. Standard & Poor's had sent the clearest signal that it was prepared to downgrade the United States' top-notch AAA rating even in the event of a political compromise.
S&P signalled a possible US downgrade last month, putting the rating on negative watch and warning that it might still cut the rating if a political deal lacked the resolve to stabilize the country's medium-term debt dynamics.
In Japan, which held around $900 billion in US Treasuries as of May, policymakers are expected to remain on guard to defend the yen from another sharp appreciation, which would be the last thing its disaster-struck economy needs.
"We welcome the US debt deal and hopefully this will stabilise markets," Chief Cabinet Secretary Yukio Edano said.