Daily Management Review

G7 Finance Leaders' Conference Is Overshadowed By The US Debt Impasse


G7 Finance Leaders' Conference Is Overshadowed By The US Debt Impasse
A meeting of the Group of Seven (G7) finance ministers on Thursday was overshadowed by the Washington impasse over raising the U.S. debt ceiling as central banks try to assure a smooth landing for the global economy. Fears of a US recession grew as a result.
President Joe Biden stepped up his pressure on Republican lawmakers on Wednesday to take quick action and raise the limit on the government's permitted borrowing from its current $31.4 trillion level, lest the largest economy in the world slip into a recession.
Treasury Secretary Janet Yellen was expected to address concerns from her counterparts at the G7 summit in Niigata, Japan, about how Washington planned to prevent instability in the financial markets, which were 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," Yellen said in Niigata on Thursday.
Japan, the largest foreign holder of U.S. debt and this year's G7 chair, is struggling to deal with the problem of U.S. debt.
"We won't go into such specific subjects," Japanese Finance Minister Shunichi Suzuki told reporters on Thursday, when asked what kind of solution Japan wanted from the United States.
The G7 finance officials will instead talk on how to effectively address financial system risks by exchanging their understanding of the knowledge gained from recent U.S. bank failures, according to Suzuki.
"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 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."
The G7 finance ministers and central bankers will presumably talk extensively about the threats to the global economy, including persistently high inflation and the results of rash interest rate increases in the US and Europe.
Yellen asserted that the global economy was "better than many had predicted six months ago," and that the US and several other G7 countries, including Canada and Japan, had seen a decline in inflation.
Even though the Federal Reserve has increased interest rates quickly, recent statistics indicated signs of deterioration in China, the second-largest economy in the world.
Data released on Thursday showed that while consumer price growth dropped to its slowest pace in more than two years, factory gate deflation in China intensified in April. This crushed government expectations that domestic demand would rebound and aid in global growth.
Other significant issues that will be discussed at the G7 finance summit include keeping Russia from avoiding sanctions over its invasion of Ukraine and diversifying supply chains away from high-income countries like China.
In previous fights over the debt ceiling, deals were frequently promptly achieved in the closing hours of talks, averting an extraordinary default.
2011 saw the first downgrade of the outstanding U.S. credit rating as a result of the panic. Veterans of that fight caution that the current situation is more hazardous because of escalating political tensions.
The G7 finance chiefs declared in a statement at the time that they were "committed to addressing the tensions arising from the current challenges on our fiscal deficits, debt, and growth."