Governments welcome U.S. debt deal, still worry about ratings

SYDNEY Mon Aug 1, 2011 12:18pm BST

Currency dealers work at a dealing room as screens display the stock price index (top, 2nd R) and exchange rate between the Korean won and U.S. dollar (top R) at a bank in Seoul August 1, 2011. REUTERS/Truth Leem

Currency dealers work at a dealing room as screens display the stock price index (top, 2nd R) and exchange rate between the Korean won and U.S. dollar (top R) at a bank in Seoul August 1, 2011.

Credit: Reuters/Truth Leem

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SYDNEY (Reuters) - Japan and Germany welcomed news of an 11th-hour deal to avoid a U.S. government default on Monday, but officials in both countries said Washington must do more to deal with its huge debt burden and the threat of a cut in its credit ratings.

Japan, second to China as America's biggest creditor, joined other countries and investors in praising 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 that there is still concern about a U.S. sovereign downgrade. It is my hope and request that U.S. authorities continue to make efforts to stabilise their public finances," Igarashi added.

Governments and policymakers had warned Washington of the risk of financial disaster if it failed to find a compromise that raised the $14.3 trillion (8.7 trillion pounds) U.S. debt ceiling before it ran out of cash to pay its dues. An official Chinese newspaper had called U.S. handling of the crisis irresponsible and immoral.

A German government spokesman said on Monday the country was pleased that political agreement looked to have been reached, but he declined to comment on the details of the agreement.

The country's banking association was more cautious.

"The political conflict is just one aspect. Now it is important to tackle the deeper economic problems which are tied to debt levels," said Michael Kemmer, head of German Banking Association BdB.

"For this to happen, a long-term plausible solution is needed, with which U.S. government income and spending can be brought back into equilibrium."

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 seizing up of government finances.

RATING FALLOUT

The concern is that 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.

Rating agencies have yet to react to the news. Standard and Poor's put its U.S. rating on negative watch last month and warned it might still cut the rating if a political deal lacked the resolve to stabilise medium-term debt dynamics.

Asia holds close to $3 trillion in U.S. government debt and as a result governments have a vested interest in holding onto Treasuries to prevent their value falling - whatever the rating.

"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 U.S. 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 a 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 U.S. politics, seemed to promise yet more uncertainty.

In Japan, which held around $900 billion in U.S. 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-hit economy needs.

"We welcome the U.S. debt deal and hopefully this will stabilise markets," Chief Cabinet Secretary Yukio Edano said.

Michael Fullilove, of Australia's Lowy Institute for International Policy, said Washington's handling of the crisis could have shaken confidence in the world's biggest economy.

"The fact it was about such a simple matter as paying your bills I think will raise questions in the minds of observers overseas," he said.

"I think it is damaging for the Americans over the long term. It is not the best way to impress the world with your adroit politics and diplomacy, that's for sure."

(Editing by Neil Fullick and Alex Richardson)

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