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The US debt freeze overshadows the G7 financial leaders’ meeting




  • Biden warns of US recession unless ceiling is raised quickly
  • Yellen optimistic on global economy, inflation
  • China’s slowing inflation is adding to fears of a global recession
  • G7 finance leaders begin meeting in Niigata, Japan

NIIGATA, Japan, May 11 (Reuters) – A row over raising the U.S. debt ceiling overshadowed a meeting of Group of Seven (G7) finance leaders that started on Thursday, raising fears of a U.S. recession as central banks seek a soft landing for the global economy.

President Joe Biden pressured Republican lawmakers on Wednesday to move quickly to raise the limit on government borrowing from the current $31.4 trillion or risk plunging the world’s largest economy into recession.

Treasury Secretary Janet Yellen was expected to face questions from her G7 colleagues, meeting in the Japanese city of Niigata, about how Washington intends to prevent turbulence in financial markets, already jittery after the recent failure of three US 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 trigger a global downturn that would set us back much further,” Yellen said in Niigata on Thursday.

The US debt crisis is a headache for Japan, which is this year’s G7 leader and the world’s largest holder of US debt.

Japan’s top finance diplomat, Masato Kanda, said on Tuesday that the G7 finance leaders may discuss the US debt ceiling but are unlikely to mention it explicitly in a joint statement at the end of their meeting on Saturday.

“The G7 will not be able to come up with a solution to what is a purely domestic and political US problem, even if the group can reaffirm its resolve to work together to stabilize markets in the worst-case scenario,” said Takahide Kiuchi, a analyst at Nomura Research Institute.

“Washington is solely responsible for getting this fixed. But when things go wrong, all the other countries bear the brunt.”

GLOBAL OUTLOOK DAMPERS

Global economic risks, including stubbornly high inflation and the fallout from aggressive US and European interest rate hikes, are likely to be among key topics of debate for G7 finance ministers and central bankers.

Yellen said the global economy was in a “better place than many had predicted six months ago”, with inflation moderating in many G7 countries including the US.

However, as rapid rate hikes by the Federal Reserve weigh on the US economy, recent data have shown signs of weakness in China, the world’s second largest economy.

China’s consumer prices rose at their slowest pace in more than two years in April as factory-gate deflation deepened, data showed on Thursday, dampening policymakers’ hopes that a rebound in the country’s demand would underpin global growth.

Other key topics to be discussed at the G7 financial 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 US debt ceiling battles have usually ended with a hastily arranged deal in the final hours of negotiations to avoid an unprecedented default. In 2011, the scramble led to the first downgrade of the prime US credit rating. Veterans of that struggle warn that the current situation is riskier because political divides have widened.

At the time, 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.”

Reporting by Leika Kihara and Andrea Shalal in Niigata; Additional reporting by Tetsushi Kajimoto and Takaya Yamaguchi; Editing by William Mallard

Our standards: Thomson Reuters Trust Principles.



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