The “most difficult” debt ceiling crisis

The “most difficult” debt ceiling crisis
The “most difficult” debt ceiling crisis

At a time when economic data and financial measures are accumulating that lead the economies of countries towards more ambiguity that obscures the vision towards progress or even making correct economic decisions, as a result of the lack of confidence in markets and investors, the G7 finance ministers warned, on Saturday, of the increasing ambiguity of the global economy.

Concerns about the default of the United States of America to pay its debts, the high rate of inflation and the economic repercussions of the Russian war on the world, on the meeting of the Group of Seven finance ministers, which lasted 3 days in the city of Niigata, Japan, which was also overshadowed by the crisis of American and European banks.

“We need to remain vigilant and be agile and flexible in our macroeconomic policies, amid increasing uncertainty over the global economic outlook,” the finance ministers said in a statement.

The statement did not refer to the crisis related to the US debt ceiling, which the markets are exposed to, as well as the increase in borrowing costs due to the monetary tightening policies of the US and European central banks.

US Treasury Secretary Janet Yellen said, on Friday, that she will meet with senior bankers on Wall Street this week. To discuss a potential US default, which would be the first since 1789.

World Bank President David Malpass said the prospect of the United States defaulting on its debt, for the first time in its history, would add to the problems facing the slowing global economy. Malpass said, according to Reuters, on the sidelines of the meeting: “This is clear. The crisis that the world’s largest economy is exposed to will negatively affect everyone.”

Regarding problems in the banking system, the statement said, policy makers will address “gaps in data, oversight and regulation in the banking system”.

Finance ministers maintained their April assessment that the financial system is “resilient” thanks to the financial regulatory reforms implemented after the 2008 global financial crisis.

The statement showed that while warning of the continued “increasing” of inflation, the central banks of the Group of Seven reaffirmed their commitment to price stability and ensuring that inflation expectations remain sober.

The banking crisis is not over yet

British finance minister Jeremy Hunt said the G7 finance ministers had “very frank and open discussions” about the challenges they face, including regulating banks. He said Britain believed the regulatory structures worked as intended and prevented much worse problems from occurring, but there were clearly lessons learned, including how digital remittances accelerated deposit withdrawals.

He praised Britain’s quick move in facilitating a private sale of the Silicon Valley Bank unit in Britain to HSBC Bank. s. B.C., a move that protected deposits without the support of taxpayers, describing the move as an achievement for regulators.

But he said Britain was reviewing the legal and regulatory structures to ensure depositors could access their deposits as quickly as possible while no further incidents occurred in the future. Referring to her expectations that the crisis is not over yet.

Hunt said that Britain was thinking pragmatically in terms of the number of high-growth companies concentrated in one branch of a US bank, and realized that financing options for such sectors needed to be more diversified. “We’re looking at a wide range of things, including pension fund reform, to see if we can give these companies more options,” he added.

While the Japanese Finance Minister said that the issue of the US debt ceiling was brought up during a working dinner on the global economy, he refused to disclose what other ministers said on this issue. The ministers concluded a 3-day meeting in the Japanese city of Niigata.

Meanwhile, a member of the European Central Bank’s Governing Council, Ignazio Visco, said that the bank should adhere to a data-based approach when examining the timing and amount of interest rate hikes, according to Bloomberg News, Saturday. “We, as the board of directors, have agreed to stick to the data as it becomes available,” said Visco, in an interview following the meeting of finance ministers from the Group of Seven major industrialized countries, in Niigata, Japan. “It is not in anyone’s interest to speculate about scenarios that can be assessed differently over time as the situation changes,” he added.

Bundesbank Governor Joachim Nagel, who is also a member of the ECB’s Governing Council, recently said that it is not possible to rule out continued rate hikes after the summer. Nagel told reporters in Niigata, “There is a consensus in the Bank’s Board of Governors that it is necessary to continue raising interest rates,” noting that “the data does not allow us to consider changing our view that continuing to raise interest rates will be necessary, and this will apply.” Also after the summer holidays.

According to “Bloomberg”, Nagel’s statements are his strongest indication that the two quarter-point increases that experts widely expect for the coming months of June and July will not be enough to return inflation to the 2 percent target from its current rate. of more than 10 percent.

The ECB’s data focused approach means that opinions on what will happen in 4 months can change easily. But some policymakers on the ECB’s Governing Council still argue that two more expected increases, by a quarter of a percentage point in each case, may not be enough to control consumer price inflation.

interest rates

A member of the Board of Governors of the Federal Reserve and appointed Vice President Philip Jefferson said that he is more optimistic than other officials in the US Central Bank about the path of inflation, considering that the institution is “on the right path.”

“I think we’re on the right track,” Jefferson said during a speech at the Hoover Institution in Stanford, California. He continued, “Is inflation still too high? Okay. Is the decline of current inflation uneven and slower than we all hope? Okay”.

However, he stressed that the Federal Reserve “is doing what is necessary and expected. Monetary policy affects the economy and inflation with long and uneven deadlines, and the full impact of (our) rapid (policy) tightening is probably not yet felt.” These statements contrast with the statements of other reserve officials who did not rule out a new hike in interest rates this week, while the markets widely expect these increases to stop. Inflation eased slightly in the United States, coming in at 4.9 percent year on year, the Consumer Price Index (CPI) released on Wednesday showed. However, at a monthly rate, inflation rose to 0.4 percent, compared to 0.1 percent in March.

However, the Federal Reserve prefers another measure of inflation, which is the personal consumption expenditures (PCE) index, which is issued at the end of the month, and is counting on its decline to 2 percent, after it was 4.2 percent in March at an annual rate.

And Philip Jefferson continued: “The good news is that food and energy prices fell in March… The bad news is that only slight progress was recorded in the level of latent inflation,” that is, related to other categories.

Since March 2022, the Federal Reserve has raised the key interest rate by five percentage points from 0 to 0.25 percent, to between 5 and 5.25 percent. The next Fed meeting is on June 13-14.

On Friday, US President Joe Biden chose Philip Jefferson, who joined the Federal Reserve Board of Governors in May 2022, to take over as vice chairman of the Federal Reserve, and the Senate must confirm this appointment.

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