US debt impasse overshadows meeting of G7 finance leaders

NIIGATA, Japan, May 11 (Reuters) – An impasse 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 favor a soft landing in the global economy.

President Joe Biden put pressure on Republican lawmakers on Wednesday to move quickly to raise the government’s permissible debt ceiling from the current $31.4 trillion, or risk tipping the world’s largest economy into recession.

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

“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.

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.

Japan’s top finance diplomat, Masato Kanda, said on Tuesday that G7 finance leaders could discuss the US debt ceiling but would not address it explicitly in a joint statement at the end of Saturday’s meeting.

“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,” Takahide Kiuchi said. 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

Global economic risks, including stubbornly high inflation and aggressive US and European interest rate cuts, are likely to be among the main topics of discussion for G7 finance ministers and central bankers.

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

As rapid rate hikes by the Federal Reserve weigh on the US economy, the latest data show 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, while factory-gate deflation deepened, data showed on Thursday, undermining policymakers’ confidence that the country’s demand will once again underpin global growth.

Other key themes discussed at the G7 financial meeting include ways to strengthen the global financial system, measures to prevent Russia from evading sanctions over its aggression in Ukraine, and diversifying supply chains away from countries like China through partnerships with low- and middle-income countries. Income countries.

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

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