Yellen warns US default would be ‘a catastrophe’ as G7 finance ministers meet

The financial leaders of the Group of Seven wealthy nations are meeting in Japan as a stand-off over the US debt ceiling and potential default looms as one of the biggest threats to the global economy.

Treasury Secretary Janet Yellen said one of her priorities in Niigata, a port city on the Japan Sea coast, would be to emphasise the importance of resolving the stand-off over the national debt in the world’s largest economy.

“A default is frankly unthinkable,” she told reporters before the broader meetings began. “America should never default. It would rank as a catastrophe,” she said.

The impasse over spending risks leaving the government unable to pay for teachers in classrooms, medical care for veterans and vital benefits to many Americans, she said.

Japan G7 Finance
Treasury Secretary Janet Yellen is meeting other G7 finance ministers (Shuji Kajiyama/AP)

The finance ministers and central bank governors are meeting for three days ahead of a G7 summit later this month in Hiroshima.

President Joe Biden said on Wednesday that he and congressional leaders had a “productive” meeting on Tuesday on trying to raise the nation’s debt limit.

They will meet again on Friday to try to avert the risk as soon as June 1 of an unprecedented government default if lawmakers in the divided Congress do not agree to raise the debt ceiling.

Mr Biden said he was “absolutely certain” that the country could avert a default, declaring that failure to meet America’s obligations, upon which much of the world’s finances are based, “is not an option”.

Mr Biden said it was “possible but not likely” that he would need to postpone his trip to Japan, Australia and Papua New Guinea later this month.

She said Mr Biden’s “historic” investments in modernising US infrastructure were a step toward improving the resilience of an economy whose reliance on global supply chains was sorely tested during the Covid-19 pandemic.

“We are taking a broad range of individual and joint actions to bring down inflation, sustain growth, and help mitigate the impact of external shocks, including to developing countries,” she said.

But she added that, “even as we face downside risks, I believe that the global economy remains in a better place than many predicted six months ago”.

The Federal Reserve said in a report this week that US banks raised their lending standards for business and consumer loans in the aftermath of three large bank failures that were in part brought on by the central bank’s sharp increases in interest rates to beat down inflation that surge to four-decade highs after the pandemic.

The Fed surveyed 65 US banks and US branches of 19 foreign banks in late March and early April, well after Silicon Valley Bank and Signature Bank collapsed in early March, touching off the latest round of bank turmoil.

First Republic Bank failed earlier this month in the second-largest bank failure in US history.

Rate increases are meant to slow lending and borrowing but can overshoot their goal, tipping the economy into recession. Moves by banks to further limit lending could further squeeze businesses and consumers.

G7 nations include Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. Others invitees to the meetings in Niigata include the European Union, IMF and World Bank, and the finance ministers of Brazil, Comoros, India, Indonesia, South Korea and Singapore.

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