G7 meeting clouded by debt crisis

A standoff in Washington over raising the U.S. debt ceiling overshadowed a meeting of Group of Seven finance leaders starting on Thursday, heightening U.S. recession fears as central banks seek a soft landing for the global economy.

President Joe Biden piled pressure on Republican lawmakers on Wednesday to move quickly to raise the limit on the government's permitted borrowing from the current $31.4 trillion maximum or risk throwing the world's biggest economy into recession.

U.S. Treasury Secretary Janet Yellen was expected to face questions from her G7 counterparts, meeting in the Japanese city of Niigata, on how Washington intends to prevent turbulence in financial markets, already jittery after the recent failure of three U.S. regional banks.

"A default would threaten the gains that we've worked so hard to make over the past few years in our pandemic recovery," Yellen said in Niigata on Thursday. "And it would spark a global downturn that would set us back much further.

"In my assessment — and that of economists across the board — a default on U.S. obligations would produce an economic and financial catastrophe," she said in a speech.

The impasse over spending risks leaving the U.S. government unable to pay for teachers in classrooms, medical care for veterans and vital benefits to many Americans, she said. It is also undermining U.S. economic leadership.

The U.S. debt crisis is a headache for Japan, which is this year's G7 chair and the world's biggest holder of U.S. debt.

"We won't go into such specific subjects," Japanese Finance Minister Shunichi Suzuki told reporters on Thursday, when asked what kind of solution Japan wanted from the U.S..

The G7 finance leaders, instead, will debate ways to better address financial system risks by sharing their understanding on lessons learned from recent U.S. bank failures, Suzuki added.

"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 stabilizing markets in the worse-case scenario," said Takahide Kiuchi, an analyst at the Nomura Research Institute in New York.

"Washington is solely responsible to get this fixed. But when things go wrong, all the other countries bear the brunt."

Global economic risks, including stubbornly high inflation and the fallout from aggressive U.S. and European interest rate hikes, will likely be among key topics of debate for the G7 finance leaders.