US closer to debt default, G7 eyes banking system resilience

Political deadlock over raising the United States’ $31.4 trillion debt ceiling is threatening to push the country into an unprecedented default by as soon as 1 June, if Congress does not act.

President Joe Biden says that failing to raise the debt limit would throw the US economy into a recession and eradicate thousands of jobs. Treasury Secretary Janet Yellen goes even further, saying a default would trigger a global economic downturn and risk undermining US global economic leadership.

Biden and top lawmakers from the rival Republican Party met to discuss the matter on 9 May. He is calling for an increase in the federal government’s self-imposed borrowing limit without conditions. But Republican House Speaker Kevin McCarthy says his chamber will only approve a deal if Biden agrees to retroactive reductions in government spending to address a growing budget deficit.

The budget deficit reached $378 billion in March, up from $193 billion a year earlier, as outlays outpaced revenues. This put the year-to-date fiscal deficit 65% higher than a year earlier at $1.1 trillion.

“We ought to have at least some restraint on our spending related to the debt ceiling, and this is not unusual,” says Senate Republican leader Mitch McConnell. “We’ve been here before. Debt ceilings have frequently carried other measures. It’s time for the President to get serious and just sit down with the Speaker and get a solution.”

But Biden claims the requests for budget cuts are driven by fossil fuel interests, with oil and gas firms wanting the government to eliminate tax credits for individuals and businesses installing energy-saving devices.

Another debt-ceiling meeting between Biden and top lawmakers planned for 12 May has been postponed until the following week. The president has not ruled out invoking the 14th Amendment to the US Constitution to declare the debt limit unconstitutional. This is an untested approach that would require litigation, he said.

Strengthening the global financial system is on the agenda for finance leaders of the Group of Seven (G7) advanced economies as they meet in the Japanese city of Niigata on 11-13 May. It comes as the recent collapse of First Republic Bank exacerbates fears over the stability of the US banking sector.

This and other recent US bank failures have led to increased calls for better global regulatory oversight of new risks to the financial sector, such as digital bank runs.

“The environment surrounding finance has changed dramatically with the emergence of social media and internet banking,” says Japan’s Finance Minister, Shunichi Suzuki, who will chair the G7 finance leaders’ gathering. “Responding to such changes have become a common challenge for countries across the world.”

US banks are reducing their lending as a result of the recent turmoil, leading private-credit firms to eye fresh lending opportunities, Reuters says. Blackstone, one of the world’s largest private lenders, says it sees a “golden moment” to expand its credit business.

About 46% of banks surveyed by the US Federal Reserve have reported tightening lending standards during the second quarter of 2023, compared with 39% in the fourth quarter of last year.

The G7 finance talks will also look at attempts to curb inflation, debt relief for poorer nations, how to create more resilient supply chains and ways to block Russia’s efforts to evade sanctions, according to Bloomberg.

And the US debt ceiling is featuring prominently, with Japanese central bank Governor Kazuo Ueda saying he has “faith US authorities will do their best to prevent it from happening”. US President Joe Biden has signalled he may have to cancel his trip to next week’s full G7 summit if the debt stand-off is not solved in time.

Tunisia and Egypt appear to be inching towards major debt crises that could impact the wider North Africa region. Shortages of essential goods and financial market dysfunction are challenging the countries. Egypt is North Africa’s largest economy and has long been assumed to be too big to be allowed to fail. Tunisia carries significance as the origin country of the Arab Spring uprisings a decade ago.

US annual inflation has fallen below 5% for the first time in two years. The consumer price index (CPI) rose by 4.9% for the 12 months to April, down from 5.0% in March. But inflation remains high, driven by rental costs and rebounds in the costs of gasoline and used motor vehicles, which could dash hopes of cuts to interest rates this year.

China is facing the opposite problem, with deflationary pressures weighing on its economy. Its CPI rose by just 0.1% on the year in April – the slowest pace in more than two years – suggesting that more stimulus measures may be needed to boost a patchy post-COVID recovery. China’s imports contracted sharply in April, with the 7.9% drop reinforcing signs of weak domestic demand.

Australia’s new budget includes AUD14.6 billion ($9.8 billion) in cost-of-living relief for families and businesses. It insists the four-year spending plan will not stoke inflation, which eased in the first quarter but still sits near 30-year highs of 7.0%. The country has recorded its first budget surplus in 15 years thanks to bumper mining profits and a strong job market boosting income tax receipts while curbing welfare payments.

The Chinese yuan overtook the dollar as the most widely used currency for cross-border transactions in China in March – the first time it has done so. It comes as a result of China dramatically increasing its use of the yuan to buy Russian commodities, Reuters reports. However, the yuan’s share of global payments remains small at 2.5%, according to SWIFT, compared with 39.4% for the dollar and 35.8% for the euro.

The European Central Bank’s future interest rate rises will be “more marginal”, bank policy-maker François Villeroy de Galhau told newspaper group EBRA. The bank slowed the pace of its rises to 25 basis points last week, putting rates at 3.25%, as it looks to reduce inflation to 2% by 2025.

The Bank of England has raised its key interest rate by a quarter of a percentage point to 4.5%. This is its 12th rise in a row, and the bank’s governor says it will “stay the course” as it seeks to curb inflation of 10.1% – the fastest of any major economy.

The Philippines’ GDP growth fell to its lowest in two years in the first quarter at 6.4%, as red-hot inflation and high-interest rates dampened consumption. But positive data in areas such as jobless rates still point to a positive outlook for 2023, and the country remains on track to meet its 6.0-7.0% growth target for the year.

Cryptocurrency exchange Binance temporarily halted bitcoin withdrawals this week amid a surge in pending transactions. It says the stoppage was a result of it not offering bitcoin miners a high enough reward to log the trades on the blockchain. Binance also suspended deposits and withdrawals in March, citing tech issues.

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