G7 finance ministers tackle global economic challenges as Yellen seeks to reassure on debt standoff

NIIGATA, JAPAN -- The financial leaders of the Group of Seven wealthy nations meet in Japan beginning Thursday as a standoff over the U.S. debt ceiling and potential default looms as one of the biggest potential threats to the global economy, along with the war in Ukraine.

U.S. Treasury Secretary Janet Yellen said one of her priorities in Niigata, a port city on the Japan Sea coast, is to emphasize the importance of resolving the standoff 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."

Japan's central bank governor, Kazuo Ueda, echoed that sentiment.

If the United States defaults on its debt, "it will become a big move and a big problem, and I think that the Fed alone, for example, may not be able to counteract it," said Ueda, who took the helm of the Bank of Japan last month.

He said he trusted the U.S. government would do its best to avoid such a situation.

The impasse over U.S. spending risks leaving the government unable to pay for teachers in classrooms, law enforcement, medical care for veterans and "cutting to the bone" vital benefits to many Americans, Yellen said.

It also is undermining U.S. economic leadership. While in Japan, Yellen also is bound to be seeking to reassure her counterparts over recent bank failures that have raised worries over risks for the global financial system.

The finance ministers and central bank governors are meeting for three days ahead of a G7 summit later this month in Hiroshima. Their talks late Thursday were due to center on efforts to support Ukraine and pressure Russia to end the war.

U.S. President Joe Biden said Wednesday that he and congressional leaders had a "productive" meeting Tuesday on trying to raise the nation's debt limit. They will meet again Friday to try to avert the risk as soon as June 1 of an unprecedented government default if lawmakers in the divided Congress don't agree to raise the debt ceiling.

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." Yellen also said she was "very hopeful" the problem can be resolved in time.

Barring that, Biden said it was "possible but not likely" that he would need to postpone a trip to Japan, Australia and Papua New Guinea later this month.

Yellen told reporters ahead of Thursday's meetings that strengthening the global financial system is a key G7 priority. So is a renewed show of support for Ukraine as a coalition of over 30 countries seeks to impose heavy economic costs on Russia for its war.

She said Biden's "historic" investments in modernizing U.S. 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 U.S. 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 surged to four-decade highs after the pandemic.

The Fed surveyed 65 U.S. banks and U.S. 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 U.S. 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.

Inflation has remained stubbornly high. Consumer prices in the United States rose 0.4% in April, up sharply from a 0.1% rise from February to March, and measures of underlying inflation stayed high, a sign that further declines in inflation are likely to be slow and bumpy even though the annual increase of 4.9% was the smallest in two years.

Other G7 economies are contending with even higher surging prices, obliging their central banks to raise interest rates that went to record lows in the early days of the pandemic.

G7 financial leaders met just a month ago, in Washington during the annual meeting of the World Bank and International Monetary Fund. There, they reiterated their commitment to helping economies cope with the impact of the war in Ukraine, to help heavily indebted countries resolve their financial vulnerability, fortify global health systems and help to tackle climate change.

The G7 consists of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. Other 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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Associated Press journalist Haruka Nuga contributed to this report.