US debt impasse overshadows meeting of G7 finance leaders

  • G7 may discuss US debt crisis, Japan says ready to respond
  • Biden warns of US recession if ceiling not raised quickly
  • G7 discusses ways to strengthen global banking system
  • Slowing China inflation adds to global recession fears
  • Yellen wants G7 debate on curbing investment into China

NIIGATA, Japan, May 11 (Reuters) – An impasse in Washington over raising the U.S. debt ceiling overshadowed a meeting of Group of Seven (G7) financial leaders that begins on Thursday, raising fears of a U.S. recession as central banks globally eased their way. Economy.

Host Japan’s central bank governor said the US debt crisis could be discussed at the G7 meeting, saying the group must be ready to respond to any market consequences.

“I hope the US authorities will do everything they can to prevent that from happening,” Kazuo Ude told reporters on Thursday.

“The immediate fallout is something for US officials to deal with. But (the G7 group) will analyze the situation and respond as needed,” he said, adding that Japanese officials were closely monitoring developments.

Treasury Secretary Janet Yellen is expected to face questions from her G7 counterparts in the Japanese city of Niigata about how Washington intends to stem the turmoil in financial markets, already strained after crises in three US regional banks and Europe.

“A default would threaten our hard-earned gains in our pandemic recovery over the past few years. And it would trigger a global recession that would push us further back,” Yellen said Thursday in Niigata.

President Joe Biden has signaled the possibility of canceling his trip to next week’s G7 summit if the debt impasse is not resolved in time, warning that the US economy could collapse if he fails to quickly raise the government’s debt ceiling from the current $31.4 trillion. In recession.

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

“The G7 cannot come up with a solution to the purely domestic and political US problem, although the group can reaffirm its resolve to cooperate in stabilizing markets in the worst-case scenario,” said Takahide Kiuchi. Analyst at Nomura Research Institute.

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

Global Outlook Diminishes

The G7 financial leaders meet at a time when aggressive US and European currency tightening is starting to weigh on global growth and fuel fears of financial instability.

After the recent failure of several US banks, the G7 will discuss strengthening the global financial system and combating the risks of digital banks, Japanese officials say.

US-China tensions also cloud the outlook for the global economy, which is already under pressure from signs of weakness in China, the world’s second largest economy.

Yellen told a news conference that Washington is considering imposing restrictions on outbound investment in China to counter its “economic coercion” against other countries.

He added that the US hopes to discuss the idea with its G7 allies at this week’s meeting.

Signs that China’s post-Covid recovery may be flagging are dampening policymakers’ hopes that a rebound in the country’s demand will help global growth. China’s consumer prices rose at their slowest pace in more than two years in April, while factory-gate deflation deepened, data showed Thursday.

Other key themes to be discussed at the G7 finance meeting include measures to prevent Russia from evading sanctions over its aggression in Ukraine and diversifying supply chains from China through partnerships with low- and middle-income countries.

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In other matters, Brazilian Finance Minister Fernando Haddad told reporters after his meeting with Yellen that he expressed serious concerns that Argentina’s economic challenges could lead to an extremist government. He said Argentina needs help from the International Monetary Fund. The United States is the largest contributor to global lending.

Debt War

Past U.S. debt ceiling battles have typically ended with a hastily arranged deal in the final hours of negotiations, avoiding an unprecedented default.

In 2011, the struggle prompted the first downgrade of the US credit rating. Veterans of that war warn that the current situation is dangerous as political divisions widen.

At the time, G7 finance leaders said in a statement that they were “committed to resolving tensions stemming from current challenges in our fiscal deficits, credit and growth.”

Reporting by Laika Gihara and Andrea Shalal in Niigata; Additional reporting by Tetsushi Kajimoto and Takaya Yamaguchi; Editing: William Mallard

Our Standards: Thomson Reuters Trust Principles.

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