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China, the largest foreign creditor to the United States, with more than US$1 trillion in treasury debt on its books, also appears to be getting worried.

Li Daokui, an adviser to the People’s Bank of China, said a default could undermine the U.S. dollar, and Beijing needed to dissuade Washington from pursuing this course of action.

“I think there is a risk that the U.S. 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.”

Interviews with government officials and investors in Asia show they consider a default such a grim — and remote — possibility that it was nearly impossible to imagine.

“How can the U.S. be allowed to default?” said an official at India’s central bank. “We don’t think this is a possibility because this could then create huge panic globally.”

Indian officials say they have little choice but to buy U.S. Treasury debt because it is still among the world’s safest and most liquid investments. It held US$39.8-billion in U.S. Treasuries as of March, U.S. data shows.

Oman is concerned about the impact of a default on the currency reserves of the sultanate and its Gulf neighbours.

“Our economies are substantially tied up with the U.S. financial developments,” said a senior central bank official, who spoke on condition of anonymity.

The U.S. 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 US$1.4-trillion this fiscal year. The U.S. Treasury Department has said it will run out of borrowing room by Aug. 2.

Marc Ostwald, a strategist with Monument Securities in London, called the default scenario “frightening” and said bondholders’ patience would wear thin if lawmakers persisted in pitching this strategy in the coming weeks.

“This isn’t a debate, this is like a Mexican standoff and that is where the problem lies,” he said.

© Thomson Reuters 2011