World Anxious for Last-Minute Debt Deal

Investors are counting on American lawmakers to reach an agreement that would stave off default.

Governments and banks around the world are anxious for lawmakers in the United States to reach an agreement that would raise their nation’s debt ceiling before the Treasury exceeds its legal ability to borrow on Tuesday.

“The world is watching the United States with trepidation,” Christine Lagarde, the managing director of the International Monetary Fund, told CNN this weekend.

As Democrats and Republicans said to be near a compromise that would avert the risk of default, British and Japanese officials on Sunday warned that failure to reach a deal could have global repercussions. “If they get this one wrong and there’s a default — we don’t expect that, we think that they will sort this out — but if that were to happen, it has consequences for every family and every business in this country and all across the world,” said the chief secretary to the British Treasury.

In Tokyo, sources familiar with Japan’s international and monetary affairs said that they were increasingly concerned that markets might be too hopeful about prospects for a lasting solution to America’s debt crisis. “Nobody thought Washington would let Lehman collapse,” one Japanese official told the Reuters news agency. “But look what happened.”

The United Kingdom and Japan, which hold $333 and $907 billion in Treasury bonds respectively, are among the United States’ largest creditors. China, which owns well over $1 trillion in American debt, has also expressed alarm.

On Saturday, China’s official People’s Daily newspaper, the mouthpiece of the Communist Party, castigated Congress’ handling of the crisis as “irresponsible” and “immoral.” It opined that Washington was to blame for a “farce,” claiming that “not a single representative has considered the world and even American national interests are being banished from the mind.

An editorial for the Xinhua news agency similarly blamed politicians of both parties for “kidnapping” the rest of the world.

Given the United States’ status as the world’s largest economy and the issuer of the dominant international reserve currency, such political brinkmanship in Washington is dangerously irresponsible, for it risks, among other consequences, strangling the still fragile economic recovery of not only the United States but also the world as a whole.

For all the jitters in international financial markets, the bulk of American debt is held domestically. Almost half, some $6 trillion, is owed either to the Federal Reserve or government accounts like Social Security and public retirement funds. An additional $3.2 trillion is owed to American investors. $4.4 out of a total debt of $14.3 trillion is held abroad. As a share of the American economy, the country’s debt to the world is relatively small, which is why it has been able to borrow at low interest rates.