UNITED STATES: An impasse in Washington over raising the U.S. debt ceiling overshadowed a meeting of the Group of Seven (G7) finance leaders on Thursday, heightening concerns about a U.S. recession as central banks work to ensure a smooth recovery for the world economy.
On Wednesday, President Joe Biden increased the pressure on Republican lawmakers to act fast to increase the ceiling on the government’s permissible borrowing from its current $31.4 trillion cap or risk sending the largest economy in the world into recession.
Treasury Secretary Janet Yellen anticipated getting questions from her counterparts at the G7 summit in Niigata, Japan, about how Washington intended to prevent instability in financial markets, which are already uneasy following the recent failure of three U.S. regional banks.
“A default would threaten the gains that we’ve worked so hard to make over the past few years in our pandemic recovery. And it would spark a global downturn that would set us back much further,” said Yellen in Niigata on Thursday.
Japan, the G7 chair this year and the largest holder of U.S. debt globally, is having trouble dealing with the U.S. debt issue.
When asked on Thursday what sort of solution Japan sought from the United States, Japanese Finance Minister Shunichi Suzuki responded, “We won’t go into such specific subjects.”
Instead, the G7 financial leaders would discuss how to effectively address financial system risks by exchanging their understanding of the lessons discovered from recent U.S. bank failures, Suzuki added.
Takahide Kiuchi, an analyst at Nomura Research Institute, said, “The G7 won’t be able to come up with a solution for what is a purely domestic and political U.S. problem, though the group could reaffirm its resolve to cooperate in stabilising markets in the worst-case scenario.”
“Washington is solely responsible for getting this fixed. But when things go wrong, all the other countries bear the brunt,” Kiuchi further added.
One of the main topics of discussion for the G7 finance ministers and central bankers is anticipated to be the risks to the world economy, such as persistently high inflation and the effects of aggressive interest rate hikes in the U.S. and Europe.
Yellen stated that the state of the world economy was “better than many had predicted six months ago,” with inflation having moderated in many G7 nations, including the US.
However, recent data has shown indications of weakness in China, the world’s second-largest economy, even as quick rate hikes by the Federal Reserve impact the U.S. economy.
Data released on Thursday revealed that factory gate deflation in China increased in April while consumer price inflation slowed to its lowest level in more than two years, dashign the authorities’ hopes that a recovery in domestic demand would support global development.
At the G7 finance meeting, other important topics to be covered include how to improve the world financial system, how to stop Russia from evading sanctions over its invasion of Ukraine, and how to diversify supply chains away from high-income nations like China by working with low- and middle-income countries.
The past U.S. debt ceiling battles have often resulted in a quickly negotiated agreement in the final hours of discussions, preventing an unprecedented default.
2011 saw the first downgrading of the stellar U.S. credit rating as a result of the recession. Veterans of that conflict caution that because political gulfs have grown wider, the current scenario is riskier.
The G7 finance leaders stated in a statement at the time that they were “committed to addressing the tensions stemming from the current challenges in our fiscal deficits, debt, and growth.”