An impasse in Washington over raising the US debt ceiling has overshadowed a meeting of the Group of Seven (G7) finance leaders starting on Thursday, raising fears of a US recession as central banks seek a soft landing for the global economy.
The host Japan’s central bank president said the US debt crisis could be discussed at the G7 meeting, adding that the group needs to be prepared to respond to any market fallout.
“I have faith that US authorities will do their utmost to prevent this from happening,” Kazuo Ueda told reporters on Thursday when asked about the chance of a US default.
“The immediate consequences are something that US authorities will have to deal with. But (the G7 group) will probably examine the situation… and respond as necessary,” he said, adding that Japanese authorities are closely monitoring developments.
US Treasury Secretary Janet Yellen is expected to face questions from her G7 counterparts gathered in the Japanese city of Niigata on how Washington plans to avoid turbulence in financial markets, already nervous after the recent collapse of three US regional banks and tensions in Europe.
“A default would threaten the gains we’ve worked so hard to get in our pandemic recovery. And it would trigger a global crisis that would set us back much further,” Yellen said in Niigata on Thursday.
US President Joe Biden has signaled the possibility of canceling his trip to the G7 summit next week if the debt impasse is not resolved in time, warning that failure to quickly increase the government’s current $31.4 trillion borrowing limit could push the US economy into recession.
The US debt crisis is a headache for Japan, which this year is the G7 president and the world’s largest holder of US debt.
“The G7 will not be able to find a solution to what is purely a US domestic and political problem, although the group may reaffirm its determination to cooperate in stabilizing markets in the worst-case scenario,” said Takahide Kiuchi, an analyst at Nomura Research Institute.
“Washington is solely responsible for fixing this. But when things go wrong, all other countries bear the weight.”
The G7 finance chiefs meet at a time when aggressive monetary tightening by the US and Europe is starting to weigh on global growth and fuel fears of financial instability.
Following the recent bankruptcy of US banks, the G7 will discuss ways to strengthen the global financial system and combat the risks of runs on digital banks, Japanese officials say.
Growing tensions between the US and China 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 said in a press conference that Washington was considering the possibility of imposing restrictions on foreign investment in China to counter its “economic coercion” against other countries.
The United States hopes to discuss the idea with its G7 allies at this week’s meeting, she added.