US debt default seen as unlikely outcome

08:34, July 27, 2011      

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Chinese economists believe that a US debt default is unlikely, but they warned that the US government should reduce excessive expenditures and avoid a deeper economic crisis.

US President Barack Obama said in a televised address in Washington that a failure to raise the $14.3 trillion debt limit by next Tuesday would be "a reckless and irresponsible outcome" to the deadlock between Republican and Democratic leaders.

"We have to do it (raise the debt ceiling) by next Tuesday, Aug 2, or else we won't be able to pay all of our bills," said Obama. "We would risk sparking a deep economic crisis - one caused almost entirely by Washington."

The Democratic-led Senate and the Republican-led House of Representatives agreed on the amount of deficit reduction, but they offered competing proposals on how much the debt limit should increase and how the deficit could be cut, which left Washington in a stalemate.

Although markets have been unsettled about a possible downgrade of the US' AAA credit rating, Chinese economists don't expect a national default.

It is only a "political game" between the two parties, and Congress won't accept a government shutdown, said Xu Hongcai, an economist at the China Center for International Economic Exchanges, a key think tank in Beijing.

"I don't believe a debt crisis will happen in the United States, but its high deficits may force the US government to cut fiscal expenditure", reducing imports from China in the short term, Xu told China Daily.

In the long run, a higher debt limit could stimulate economic growth in the US and slow the depreciation of the greenback, according to Xu.

Ba Shusong, a senior researcher on financial issues at the Development Research Center under the State Council, said that whether Congress raises the debt limit or not, it can't change the reality that "the US debt situation is deteriorating".

"It has forced the US to accelerate the adjustment of its fiscal structure, " said Ba.

China's foreign exchange regulator, the State Administration of Foreign Exchange, has urged the US government to take "responsible" policy measures to raise market confidence in the dollar and US government debt.

Worries of a downgrade of the US credit rating increased after Republicans and Democrats moved further apart. Obama on Monday chastised some Republicans for insisting on a "cuts-only" approach and opposing White House calls for the country's wealthiest to give up tax cuts.

The potential risk of a US downgrade might further weaken the dollar and drive up global commodity prices, which could increase imported inflationary pressure in China, Zhuang Jian, senior economist with the Asian Development Bank, told China Daily.

China should maintain its tight monetary policies and be alert to inflows of international speculative money, which could further boost asset bubbles in China, according to Zhuang.

John Ross, visiting professor at Antai College of Economics and Management, Shanghai Jiao Tong University, also said he believed that the US will not default because the country "knows it would be extremely damaging to its future credibility.

"China will not be directly affected regarding its holdings of US debt, as all financial obligations on these will be met," said Ross.

Source:China Daily
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