US delay stokes meltdown fears

British and Japanese officials warned yesterday of disastrous consequences for the global economy if last-minute talks among lawmakers in Washington failed to agree on raising the US borrowing limit and averting a debt default. Governments across the world fear that because of the key role of the US dollar in global banking and trading systems, there could be severe instability when Asian financial markets reopen today if a US debt deal is not in sight by then. In Washington, Senate Minority Leader Mitch McConnell, the top Senate Republican who is playing a key role in the debt talks, said \"we\'re very close\" to a $3 trillion (Dh11 trillion) deal that would raise the debt ceiling while cutting the US budget deficit. But a senior White House official warned that an agreement was \"not there yet\". Article continues below \"If they get this one wrong and there\'s a default — we don\'t expect that, we think that they will sort this out — but if that were to happen, it has consequences for every family and every business in this country and all across the world,\" said Danny Alexander, Chief Secretary to the British Treasury. \"I think in the end the politicians on Capitol Hill can see that the precipice they are looking over is one that they are going to step back from,\" Alexander told BBC television. \"But it is something that would have a big effect on the global financial system and on the global economy, where the United States is one of our major trading partners, that could have really big implications for the United Kingdom.\" Too optimistic In Tokyo, sources familiar with Japan\'s international and monetary affairs said they were increasingly concerned that markets might be too optimistic about prospects for a lasting solution to the crisis. Japanese officials still hope Washington can strike a deal and if that proves impossible, will give priority to interest payments to international holders of US Treasury debt to limit the immediate market impact, the sources said. But Tokyo\'s concern is that if the crisis drags on without a clear and long-term solution, markets may be thrown into turmoil in the same way that they suffered when US investment bank Lehman Brothers collapsed in September 2008. \"If there is a default, the impact on global markets will be huge,\" said one of the sources, who declined to be named because of the sensitivity of the matter. Britain is the third largest foreign holder of US Treasury debt and Japan is the second largest. China is the biggest with well over $1 trillion invested in US Treasuries; about two-thirds of its $3.2 trillion of foreign exchange reserves are estimated to be held in dollar assets. On Saturday the official People\'s Daily newspaper, the mouthpiece of the Chinese Communist Party, castigated the US handling of the debt crisis in an editorial as \"irresponsible\" and \"immoral\". It said the US democratic system was to blame for the \"farce\", claiming that \"not a single representative has considered the world, and even US national interests are being banished from the mind\". On Friday a senior economic policymaker in the Eurozone, who declined to be named, told Reuters he was optimistic Washington would solve the problem but expressed surprise and anger that US politicians were \"playing chicken\" with an issue of such importance for the global economy. If there is no US debt deal by today, central banks around the world are expected to stand ready to provide emergency supplies of money to commercial banks in case the banks become too nervous to lend to each other. Japan\'s first defence will be to ensure that Japanese financial institutions have a sufficient supply of dollars, the sources in Tokyo indicated.