Treasury Secretary Janet Yellen arrives in Japan this week, her ambitious economic agenda derailed by a heated partisan dispute over the US debt ceiling, which risks a new financial catastrophe, and Republicans blocking a landmark tax agreement.
Yellen spent last year championing G7-led sanctions against Russia for its invasion of Ukraine. She’ll most likely spend the most of the two-day conference in Niigata convincing the same group that a payment failure will not devastate the global economy.
The shift illustrates how profoundly U.S. partisan divides can reverberate around the globe and stall the Biden administration’s multilateral economic goals.
“Yellen has got a tough brief for the G7. Having to deal with the debt ceiling puts egg on the face of the U.S. as an economy globally,” said Harry Broadman, a former White House, World Bank and U.S. trade official, adding that it distracts from other initiatives.
Republicans’ control of the House of Representatives since January has made it more difficult for Yellen to deliver on promises Democrats made in multilateral negotiations, such as U.S. participation in the 15% global minimum corporate tax, for which she won support in 2021.
“Governing in the U.S. now on economic matters is as about as tough as I’ve seen it because there is such intransigence, particularly on the Republican side,” added Broadman, managing director at Berkeley Research Group.
Republican House of Representatives Speaker Kevin McCarthy argued ahead of a high-stakes meeting on Tuesday with President Joe Biden that some spending concessions on the debt limit were necessary to bring a spiraling U.S. deficit under control, and Biden “has got to stop ignoring problems.”
Yellen, who did not attend the meeting, will use a news conference in Japan on Thursday to speak about the risks of a U.S. debt default, which the Treasury said could come as soon as June 1. She will warn about “the global impact of this standoff and highlight the need to avoid default,” a senior Treasury official said.
The U.S. bond market is the foundation for the global financial system, with the dollar as the reserve currency and Treasury debt long regarded as the world’s safest and most liquid financial asset — a status Yellen said would be eroded in a default.
Making matters worse, she also will need to reassure G7 finance ministers and central bank governors that pressures on U.S. regional lenders won’t spin out of control after a third major bank failure.
Yellen delayed her trip to Japan to personally call U.S. business executives and appear on several major television shows to warn U.S. lawmakers that failure to raise the $31.4 trillion borrowing cap would be a “catastrophe” for global financial markets and the economy.