Asia-Pacific News

Debt Deal Will Happen, Even as US Holds World ‘Hostage’: Analysts

As the U.S. debt talks teeter on the brink of a collapse, most analysts CNBC spoke to remain positive of some form of an agreement, even as political posturing threatens to scupper a deal.

"It is a bit scary... that the U.S. economy is holding the world hostage for a relatively minor ideological point of view," Mikio Kumada, Executive Director of LGT Capital Management told CNBC on Monday. "If you look at it from a global perspective...we know that they have to cut spending and raise taxes in some form."

Eric Rosenkranz, Chairman and Founder of consultancy eThree-Asia, says politics, not economics, are at the core of the negotiations.

“What we're really seeing here is the first skirmish in the battle for the White House in 2012, this is a political issue 100 percent," said Rosenkranz.

"People on both sides of the political spectrum know they have to raise the debt ceiling, they know they have to cut spending, they know they have to increase revenue, there's not a debate about that.”

As talks among congressional leaders broke down over the weekend, there were reports that House Speaker John A. Boehnerand Senator Harry Reid were preparing separate backup plans to raise the debt ceiling .

Rosenkranz believes Boehner is prepared to ink a quick deal with President Barack Obama, but is constrained by his own party.

US May Undergo Temporary Default

"When John Boehner walks out of the talks, it's not because he does not believe in what's going on; he would actually cut a deal with Obama in the next 5 minutes, it's [because] he cannot deliver in the votes of the tea party Republicans."

"It's brinksmanship,” said Andrew Economos, Asia Head of Sovereign & Institutional Strategy at JP Morgan Asset Management, but adds that a deal will eventually surface. “We need to get some media spotlight on Congress, that's what they do for a living, and as a result they will cut a deal."Click here for full interview.

Even if the U.S. misses the August 2 deadline, Rosenkranz believes a default will be temporary.

"The default will maybe last one or two days, Republicans will do that to make a point, and then probably by Wednesday or Thursday we'll have a temporary 3-6 months increase," he said.

JP Morgan Asset Management's Economos agrees, adding that the U.S. has the ability to finance its debt.

"Ultimately it's not about the level of debt, it's about the ability of the U.S. government to finance that debt. And as long as nominal GDP stays above nominal interest rates, then the U.S. can continue to finance this, it's business as usual," he said.

History, however, might provide some clues to how this event might end.

"The one net positive for me is I've seen this movie before, 16 years ago," observedJames Holt, Vice President of BlackRock Investment Management, referring to the government shutdown during Clinton's administration.

"And the ironic thing is, despite all the doom and gloom about the government shutdown at the time, a year later, Americans produced their first budget surplus in decades, and went on to produce four more between 1996 and 2000."