Big creditors China, Japan press U.S. to resolve debt fight

By Ben Blanchard and Tetsushi Kajimoto

BEIJING/TOKYO (Reuters) - Japan's finance minister pressed the United States on Tuesday to resolve its political deadlock over government finances quickly to avoid a fiscal crisis that could damage the global economy.

The comment from Taro Aso was the latest sign that Japan and China - the biggest foreign creditors of the United States - are increasingly worried that the U.S. government shutdown and the standoff over the debt ceiling could wreak havoc on their trillions of dollars of investments in U.S. Treasury bonds.

"The U.S. must avoid a situation where it cannot pay (for its debt) and its triple-A ranking plunges all of a sudden," Aso told reporters following a cabinet meeting.

"The U.S. must be fully aware that if that happens, the U.S. would fall into fiscal crisis," he said.

Japan's Nikkei financial daily, citing unidentified sources, reported that Japanese officials held several emergency telephone conferences with U.S. Treasury officials on Monday.

However, a senior Japanese government official shrugged off the report, suggesting instead that the subject had been discussed only as part of regular contact between the two countries. Similarly, a U.S. Treasury official said the Treasury had no knowledge of emergency calls.

On Monday, Chinese Vice Finance Minister Zhu Guangyao said Beijing had been in touch with Washington over the standoff, in which Republicans in the House of Representatives have refused to increase the $16.7 trillion debt ceiling as they seek changes in President Barack Obama's signature healthcare law.

The U.S. Treasury has said it would hit the debt ceiling by October 17, at which time it would have only around $30 billion and incoming revenues to pay the government's bills, leaving the nation on the edge of default unless Congress raises the cap.

The political standoff is in its second week, with much of the U.S. federal government closed and no signs of a breakthrough, although some glimmers of hope emerged on Monday as Obama said he would accept a short-term increase in the nation's borrowing authority to avoid a default.

TRILLIONS AT STAKE

As of July 31, China held $1.28 trillion in U.S. Treasury bonds and Japan held $1.14 trillion, Treasury Department data shows.

The last big confrontation over the debt ceiling, in August 2011, ended with an 11th-hour agreement under pressure from shaken markets and warnings of an economic catastrophe if a default were allowed to happen.

China is "naturally concerned about developments in the U.S. fiscal cliff," Zhu told reporters, saying it was Washington's "responsibility" to avoid a debt crisis and ensure the safety of Chinese investments.

But IMF Chief Economist Olivier Blanchard told reporters in Washington that a U.S. debt default, while affecting China's portfolio of bonds, would not have any major implications for the Chinese economy. He spoke about China while presenting the IMF's latest snapshot of the global economy.

Japan has previously expressed its concerns in diplomatic terms. Aso and Chief Cabinet Secretary Yoshihide Suga both said last week that the fiscal standoff was essentially a U.S. domestic problem.

But Aso added that the shutdown could push up the yen against the dollar - a concern for Japan's export-reliant economy, which has benefited from a decline in the yen since Prime Minister Shinzo Abe won election in December on a reflationist policy platform.

Should the United States default on its debt, "there would be a large international impact," Aso said last week. "If there is no prompt resolution, various impacts will emerge."

The yen has been rising this month as investors shed risk and seek the perceived safe haven of the Japanese currency. The dollar slipped on Tuesday to a two-month low of 96.55 yen in Asia trade but it moved higher later in the day. (Additional reporting by Yuko Yoshikawa, Richard Cowan, Mark Felsenthal, Aaron Sheldrick and Kiyoshi Takenaka and Anna Yukhananov in Washington; Writing by William Mallard; Editing by John Mair, Chizu Nomiyama and Dan Grebler)