US Republican lawmakers are 'playing with fire' by contemplating even a brief debt default as a means to force deeper government spending cuts, an adviser to China's central bank has said.
The idea of a technical default - essentially delaying interest payments for a few days - has gained backing from a growing number of mainstream Republicans who see it as a price worth paying if it forces the White House to slash spending, Reuters news agency reported yesterday.
But any form of default could destabilise the global economy and sour already tense relations with big US creditors such as China, government officials and investors warn.
Li Daokui, an adviser to the People's Bank of China, said a default could undermine the US dollar, and Beijing needed to dissuade Washington from pursuing this course of action.
'I think there is a risk that the US debt default may happen,' Li told reporters on the sidelines of a forum in Beijing.
'The result will be very serious and I really hope that they would stop playing with fire.'
China is the largest foreign creditor to the United States, holding more than $1 trillion in Treasury debt as of March, US data shows, so its concerns carry considerable weight in Washington.
'I really worry about the risks of a US debt default, which I think may lead to a decline in the dollar's value,' Li said.
The US Congress has balked at increasing a statutory limit on government spending as lawmakers argue over how to curb a deficit which is projected to reach $1.4 trillion this fiscal year.
The US Treasury Department has said it will run out of borrowing room by 2 Aug.
If the United States cannot make interest payments on its debt, the Obama administration has warned of 'catastrophic' consequences that could push the still-fragile economy back into recession.
Financial markets are following the US debate but see little risk of a default.
The US probably would not be able to maintain its prized AAA sovereign ratings status if it suffered even a 'technical' default on its debt, Fitch ratings agency said today.
In a statement, Fitch warned it would downgrade the US sovereign ratings to 'restricted default' in August if the government fails to honour payments on US Treasury securities due on 15 August.
'Even a so-called 'technical default' would suggest a crisis of 'governance' from a sovereign credit and rating perspective,' Fitch said in its statement.
'Though such an event (such as a short-lived Treasury bill default) may not permanently impair the capacity of the US government to service its obligations, it is unlikely that its 'AAA' status would be retained in the short to medium term.
Fitch added, however, that it believed US lawmakers would ultimately reach an agreement to raise the country's debt ceiling and avoid any default.
