NIIGATA, JAPAN: A dispute over lifting the US debt ceiling overshadowed the Group of Seven (G7) finance leaders’ summit, which began in Japan on Thursday.
The huddle is taking place amidst heightened concerns about a US recession as central banks struggled to ensure a smooth recovery for the world economy.
On Wednesday, US President Joe Biden asked Republican lawmakers to act fast and increase the government’s legal borrowing ceiling from its current $31.4 trillion or risk throwing the largest economy in the world into recession, Reuters said.
When the G7 nations met in the Japanese city of Niigata, US Treasury Secretary Janet Yellen was anticipating being questioned by them about how Washington planned to minimise instability in the financial markets, which were already uneasy following the recent bankruptcy of three US regional banks.
“A default would jeopardise our progress in recovering from the pandemic over the past few years. And it would start a worldwide recession that would further set us back,” Yellen said.
As the world’s largest holder of US debt and the G7 chair this year, Japan is troubled by the US debt issue. Masato Kanda, the senior financial diplomat for Japan, predicted on Tuesday that while the G7 finance leaders could debate the US debt ceiling, they probably won’t specifically address it in their joint statement following their meeting on Saturday.
According to Takahide Kiuchi, an analyst at Nomura Research Institute, “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 alone is in charge of fixing this. However, all the other nations suffer the most when something goes wrong.
GLOBAL OUTLOOK DAMPENS
The G7 finance ministers and central bankers will probably spend significant time discussing the risks to the world economy, such as persistently high inflation and the effects of aggressive interest rate hikes in the US and Europe.
According to Yellen, the global economy is “better than many had predicted six months ago,” and inflation is declining across most G7 nations, including the United States.
However, recent data has shown signals of weakness in China, the world’s second-largest economy, as quick rate hikes by the Federal Reserve put pressure on the US economy. Data released Thursday revealed factory gate deflation in China deepened in April while consumer price rise slowed to its lowest rate in more than two years. This dashed officials’ hopes that a recovery in domestic demand would support global development.
Other key issues to be discussed at the G7 finance summit include steps to prevent Russia from circumventing sanctions over its invasion of Ukraine, diversifying supply chains away from countries like China through partnerships with low- and middle-income nations, and ways to strengthen the global financial system.
Previous debates over the US debt ceiling have often resulted in quickly negotiated agreements in the final hours of discussions, preventing an unprecedented default. The panic led to the first downgrading of the stellar U.S. credit rating in 2011.
Veterans of that conflict warn that the current scenario is more dangerous because political divisions have widened. The G7 finance ministers declared that they were “committed to addressing the tensions resulting from the current challenges on our fiscal deficits, debt, and growth.”
