A standoff over raising the U.S. debt ceiling overshadowed a meeting of Group of Seven (G7) finance leaders starting on Thursday, heightening U.S. recession fears as central banks seek a soft landing for the global economy.
President Joe Biden piled pressure on Republican lawmakers on Wednesday to move quickly to raise the limit on the government’s permitted borrowing from the current $31.4 trillion or risk throwing the world’s biggest economy into recession.
“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,” Yellen said in Niigata on Thursday.
The U.S. debt crisis is a headache for Japan, which is this year’s G7 chair and the world’s biggest holder of U.S. debt.
“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 stablising markets in the worse-case scenario,” said Takahide Kiuchi, an analyst at Nomura Research Institute.
“Washington is solely responsible to get this fixed. But when things go wrong, all the other countries bear the brunt.”
GLOBAL OUTLOOK DAMPENS
Global economic risks, including stubbornly high inflation and the fallout from aggressive U.S. and European interest rate increases, will likely be among key topics of debate for the G7 finance ministers and central bankers.
As rapid rate hikes by the Federal Reserve weigh on the U.S. economy, however, recent data has shown signs of weakness in China, the world’s second-largest economy.
China’s consumer prices rose at the slowest pace in more than two years in April, while factory gate deflation deepened, data showed on Thursday, dashing policymakers’ hopes that a rebound in the country’s demand would underpin global growth.
Other key themes to be discussed at the G7 finance gathering include ways to strengthen the global financial system, steps to prevent Russia from circumventing sanctions over its invasion of Ukraine, and diversifying supply chains away from countries like China through partnerships with low- and middle-income nations.
Past U.S. debt ceiling fights have typically ended with a hastily arranged agreement in the final hours of negotiations, avoiding an unprecedented default. In 2011, the scramble prompted the first downgrade of the top-notch U.S. credit rating. Veterans of that battle warn the current situation is riskier because political divides have widened.
Back then, the G7 finance leaders said in a statement that they were “committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth.”
