Finance Chiefs Warn Against Failure in US Debt Deal

International finance chiefs welcomed signs U.S. lawmakers are working to resolve their debt spat as they warned failure to do so would hurt the world economy.

Group of 20 officials meet in Washington today after House Republicans and the White House considered a short-term increase in the U.S. debt limit to buy the time to negotiate a longer-lasting deal that allows America to dodge default.

'Everybody knows that a solution must be found, and I've got no doubt that it will be found,' French Finance Minister Pierre Moscovici told Bloomberg Television's Sara Eisen in Washington. 'It would be of huge importance if no solution was found.'

The political stalemate that closed the U.S. government for the last 10 days is casting a shadow over weekend talks of the International Monetary Fund, usually an event at which the U.S. gives rather than receives advice. Policy makers arrived in the U.S. capital yesterday fretting the impasse could end with the world's largest economy unable to cover its bills and returning to recession, hobbling worldwide expansion.

If the standoff persists, 'it is probably safe to say that this could cause severe damage to the U.S. economy and the world,' European Central Bank President Mario Draghi said. 'The world still does not believe that the United States will not find a way out.'

Debt Limit

U.S. Treasury Secretary Jacob J. Lew said the department will run out of measures to say below the $16.7 trillion borrowing limit Oct. 17. Under a pact proposed yesterday, the lapse of borrowing authority would be delayed until Nov. 22 without attaching policy conditions.

U.S. stocks jumped yesterday, with benchmark indexes surging the most since January, on expectations a deal would be struck. Rates on Treasury bills tumbled.

'I hope for an early resolution to these issues and for the U.S. economy to continue supporting the global economy,' said Bank of Japan Governor Haruhiko Kuroda.

U.S. Treasury and Federal Reserve officials said the debt limit issue will most likely be resolved by Oct. 17, Russian Finance Minister Anton Siluanov told reporters yesterday after a G-20 dinner in Washington.

Overcome Difficulties

A short-term debt limit increase wasn't discussed in detail because Lew and Fed Chairman Ben S. Bernanke 'think that these difficulties can be overcome in the nearest future and hope they'll find a solution by the 17th,' Siluanov said.

The Debt Ceiling

Lew embraced the arrival in Washington of his counterparts as a reason for lawmakers to break the gridlock. Warning the safe haven status of U.S. assets was being jeopardized, he told the Senate Finance Committee yesterday that 'the world actually counts on us being responsible.'

'I met with finance ministers from Africa and with finance ministers from Latin America and it's challenging when they look at you and they ask what's going on in Washington -- it makes them nervous about their economies,' said Lew.

In a reflection of such nervousness, Hong Kong's futures and options market operator demanded yesterday traders put up more collateral when using some Treasury bills to back up their positions. Hong Kong is a special administrative region of China, the largest overseas holder of U.S. Treasuries, with $1.28 trillion worth of them at the end of July.

Entire World

'The market doesn't like uncertainties,' Yi Gang, deputy governor of China's central bank, said in Washington. 'They watch this drama very closely. This is about the entire financial market of the world.'

By contrast, Saudi Arabia, the biggest oil exporter, is not altering its 'positive view' of U.S. Treasuries, central bank chief Fahad Almubarak said yesterday in Washington.

'The U.S. current crisis will go away, and we think its effect won't be lasting on our investments,' Almubarak said. 'Our long-term view is positive.'

The potential fallout was still enough for the IMF to warn this week that a default could 'seriously' harm economic output as it cut its forecasts for global growth to 2.9 percent this year and 3.6 percent in 2014.

IMF Managing Director Christine Lagarde yesterday welcomed the negotiations, having warned delay could 'precipitate another crisis.'

'As much as six to eight weeks is very welcome,' she said. 'Much longer would be a lot better.'

Further Pressure

Other threats to recovery lie outside the U.S. Emerging markets, the locomotive of expansion in the post-crisis years, have weakened. Performance also remains lackluster in the euro area, where some banks still struggle to fortify their balance sheets and Germany has yet to form a coalition government.

The U.S. may face further pressure from foreign officials to clarify its plans for monetary policy after the Federal Reserve signaled earlier this year that it may start to taper its $85 billion asset-purchase program, before deciding last month to leave it unchanged.

Members of the Group of 24 emerging markets said after a meeting in Washington yesterday that they are 'concerned by the higher volatility in global financial markets following indications of exit from unconventional monetary policies' and urged advanced nations to be 'mindful of negative spillovers.

Speculative Flows

Reserve Bank of India Governor Raghuram Rajan said there was also an onus on emerging markets to take steps so they weren't hurt by the to and fro of speculative capital flows.

''When there's money sloshing around the world that's the time to start building buffers of your own,' he said.

A draft copy of the G-20's communique, obtained on Oct. 7 and subject to revision today, said the withdrawal of monetary stimulus was a key risk to the global financial system. It urged central bankers to ensure their actions are 'carefully calibrated and clearly communicated.'

'We all understand that there needs to be better communication, there needs to be greater predictability and better coordination among all of us at the G-20 so that we can minimize turbulence,' South African Finance Minister Pravin Gordhan said in an interview.

That may be easier said than done, said Saudi Arabia's Almubarak.

'It will be challenging to execute such coordination,' he said. 'Central banks are mandated with domestic objectives. It may be challenging for local authorities to also be responsible for spillovers to other countries.'

Adopting a minority view within the G-20, Canadian Finance Minister Jim Flaherty urged Fed officials to end their quantitative easing as 'quickly as they can.'

To contact the reporters on this story: Aki Ito in San Francisco at aito16@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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