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London/TOKYO, July (Reuters)-Governments and politicians around the world warned of the risk of financial disaster if Washington fails to lift the U.S. debt ceiling.
Congress haggled over a deal to avert the risk of an unprecedented breach of U.S., British and Japanese officials on Sunday said bankruptcy could hurt families around the world.
"The world is watching the United States with trepidation, anxiety, with concern, but also with hope," International Monetary Fund Managing Director Christine Lagarde told CNN.
"Instability is never a good idea, never a good idea. And this level of uncertainty, trepidation arising from 2 August, is taking on a lot of instability, "he added.
United States Democrats and Republicans face a Tuesday deadline to reach an agreement. Treasury of the United States said that it will run out of borrowing room on that day, although analysts say they may have enough money to keep maintenance of its debt and paying bills through the middle of this month.
The German Central Bank expressed confidence in the United States could avert a debt default.
The key role of the dollar in global banking and financial markets trading means addressing the risk of major instability without an agreement 11 hours.
Senate Leader Harry Reid said that he hoped to hold a vote of the Senate later Sunday on an emerging deal to raise the debt ceiling, raising the hope that the deadlock could be broken.
As financial markets open for the week in Asia, investors took some relief from the signs of progress and the US dollar strengthened against the Japanese yen, falling to four-month low on Friday.
"If they get this one wrong and there is a default--we don't expect that we think you will sort this out-but if that happens, has consequences for every household and every company in this country and around the world," said Danny Alexander, Chief Secretary to the Treasury.
"I think eventually that politicians on Capitol Hill can be seen looking on the precipice is one they're going to step back from," he told BBC television.
In Tokyo, said sources familiar with international and Monetary Affairs of Japan, speaking earlier on Sunday, which were increasingly worried that the markets might be too confident about the prospects for a lasting solution to the crisis.
Japanese officials still hope Washington can strike a bargain and if that proves impossible, we will give priority to the interest payments to holders of u.s. Treasury debt to limit the immediate impact of the market, the sources said.
But Tokyo's concern is that if the crisis drags without a clear solution and long-term markets may be thrown into turmoil in the same way that suffered when U.S. Investment Bank Lehman Brothers collapsed in September 2008.
"If there is a default value, the impact on global markets will be enormous," said one of the sources, who declined to be named because of the sensitivity of the issue.
Another Japanese source, said, "no one thought that Washington would leave Lehman collapse. But look what happened. "
The German Central Bank said it was monitoring the situation. "Should really not be a solution, it begs the question: what happens then," said a spokesman for the German Central Bank. "But I expect there will be a solution in the United States today or in the coming days ".
CHINA
China, which has more than 1,000 billion dollars in Treasury bonds of the United States, has expressed alarm. On Saturday, the official people's daily, the mouthpiece of the Communist Party of China, castigated the U.S. debt crisis management as "irresponsible" and "immoral".
He said that the American democratic system was to blame for the "farce", saying that "not a single representative has given the world, and even national interests of the United States are being banished from the mind.
On Friday, a senior economic policymaker in the euro area, who declined to be named, expressed surprise and anger that u.s. politicians were "playing chicken" with an issue of such importance for the global economy.
Euro-zone leaders are struggling to control the sovereign debt crisis in many countries in their region, an operation complicated by U.S. debt problem that has added to the upward pressure on yields of government bonds in weak States.
It is expected that the world's central banks are ready to provide emergency supplies of money to commercial banks, in case banks become too nervous to lend to each other.
Before Japan's defence will be to ensure that Japanese financial institutions have a sufficient supply of dollars, said the sources in Tokyo.
The Bank of Japan considers Japanese commercial banks have enough pillows dollar but will use its dollar exchange agreements with other central banks to prevent a collapse of the dollar in case of market turmoil.
In June, the US Federal Reserve extended liquidity exchange agreement with other major central banks until August 1, 2012.
The Bank of Japan is also ready to flood the markets with yen through open market operations in case of inter-bank borrowing costs spike, say officials BOJ.
In Europe, there have been minor signs of strain in the money markets last week with some banks becoming unable to enter into long-term loans in dollars, but the effect was small, since banks still predicted that Washington would reach an agreement.
The European Central Bank already offers unlimited euro loan to banks in some of its money market operations as part of its response to the crisis in the past, and that the policy could use to cope with problems of the market this week.
A spokesman for Switzerland's Central Bank, said, "the National Bank Switzerland is ready to react appropriately at any time to market disruptions."
(Additional reporting by Lesley Wroughton in Washington; Written by Andrew Torchia; Editing by David Cowell)
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