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Relief Felt Around World as U.S. Avoids Debt Default

October 17, 2013
global economy2
  

Political leaders, investors and ordinary people Thursday welcomed the end of a U.S. government shutdown but already were looking ahead to the next round of a budget battle that brought the world's biggest economy close to default and threatens Washington's international standing.

The deal approved late Wednesday by Congress, with hours to go before the government reached its $16.7 trillion debt limit, only permits the Treasury to borrow through Feb. 7 and fund government through Jan. 15. The International Monetary Fund appealed to Washington for more stable long-term management of the nation's finances.

The standoff rattled global markets and threatened the image of U.S. Treasury debt as a risk-free place for governments and investors to store trillions of dollars in reserve. Few expected a default but some investors sold Treasurys over concern about possible payment delays and put off buying stocks that might be exposed to an American economic downturn.

IMF managing director Christine Lagarde welcomed the deal but said the shaky American economy needs more stable long-term finances.

"It will be essential to reduce uncertainty surrounding the conduct of fiscal policy by raising the debt limit in a more durable manner," Lagarde said in a statement.

The Tokyo stock market, Asia's heavyweight, gained 0.8 percent Thursday. Markets in South Korea, Australia and Southeast Asia also rose.

Such relief might be only temporary without a long-term settlement, said Standard Chartered economist Samiran Chakraborty in Mumbai.

"In three months' time, this could be back again," said Chakraborty. "If this kind of pushing it back happens several times, then this comfort that the markets had over the last 20 days that a deal will be reached, that comfort may now be dead."

Also, the congressional cliffhanger might dent longer-term confidence in American government debt, a cornerstone of global credit markets, prompting creditors to demand higher interest.

"With the U.S. government's antics, the risks go up, so the cost of money could go up too," said Nick Chen, managing partner of Taipei law firm Pamir Law Group.

Big Asian exporters including China and South Korea also faced the risk of a slump in global demand if a U.S. default had disrupted other economies.

China's government, Washington's biggest foreign creditor with $1.3 trillion invested in Treasurys, welcomed the end to the standoff.

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