TOKYO, Aug 1, 2011 (AFP) - Asian nations led by Japan on Monday welcomed a last minute deal in the United States to raise the debt ceiling and avoid a catastrophic default, as regional stock markets also rallied on the news.
But there was concern that the United States' ongoing economic problems would still lead to its credit rating being downgraded for the first time in its history.
US President Barack Obama said late Sunday that Democrats and Republicans had finally hammered out an a tentative agreement, after weeks of bickering that led to dire warnings of another global financial crisis if the limit was not raised.
Japanese Chief Cabinet Secretary Yukio Edano said on Monday: "Japan welcomes the announcement that an agreement was made to avoid default. We expect the deal will lead to the stabilisation of markets."
Finance Minister Yoshihiko Noda said he was "glad to see the last-minute development".
The deal will come as a relief for Japan, which is the second-largest holder of US Treasuries after China.
Zhu Baoliang, an economist with China's National Development and Reform Commission, said the deal would ease long-term investors' worries, but described the chance of a US downgrade as "still a large one."
"I am still expecting a downgrading on Monday. The reduction in the deficit is too small, which will do little to help make their financial situation more sustainable," he warned.
"The debt problem is likely to fuel inflation and further depreciation of the US dollar, adding to upward pressure on global inflation and the yuan exchange rate."
Australian Treasurer Wayne Swan said the global economy will grow in confidence if the US can demonstrate it is on a path to a sustainable budget position.
"What markets are really looking for is a long-term path back to fiscal sustainability," he told state broadcaster ABC.
"If they can demonstrate that, we'll see a lot more confidence in global markets and that can only be good for the global economy and, of course, the Australian economy."
And in South Korea Huh Jin-Ho, chief of the central bank's global economy research division, said the agreement will help ease market uncertainties and attract global investors into the safe haven of US government securities.
"When it comes to safe haven assets, there's no alternative to US Treasuries," he said.
Huh said the breakthrough will also help strengthen the dollar as concerns fade about a possible US sovereign debt downgrade.
Philippine finance secretary Cesar Purisima hailed the US deal, saying "we're glad the unthinkable did not happen."
Business and finance leaders warned that default would send crippling aftershocks through the fragile US economy, still wrestling with stubbornly high unemployment of 9.2 percent in the wake of the 2008 global meltdown.
The deal also sent Asian stock markets higher after a nervous few weeks as US lawmakers took their discussions to the brink, just over a day before the Treasury says it will run out of money to pay its bills on August 2.
Tokyo closed 1.34 percent higher, Sydney gained 1.65 percent and Seoul rose 1.83 percent while Hong Kong was up 1.53 percent by the break.
The dollar also strengthened against the yen.
Concerns over the protracted debt negotiations had sent the greenback close to post-War lows against the safe haven yen, with risk-averse investors embracing the Japanese unit.
However, despite the optimism, the proposed deal still has to be approved by Congress.
Leaders of the Democratic-held Senate and the Republican-led House of Representatives said they would present the framework to their rank-and-file on Monday ahead of final votes to approve the deal.
If given the go-ahead, the deal will raise the debt ceiling by at least $2.1 trillion -- enough to reach 2013 -- and entail cuts of $2.5 trillion dollars in two rounds, an official said Sunday.
The parties have until Tuesday to raise the $14.3 trillion debt limit.
The US government hit the debt limit in May and has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating normally -- but can only do so until August 2.
-- Dow Jones Newswires contributed to this story --