The US debt ceiling is a legal limit on how much the federal government can borrow to pay its bills. It was created in 1917 and has been raised or suspended 98 times since then. The current debt ceiling is $28.4 trillion and was reached on August 1, 2021.
If Congress does not raise or suspend the debt ceiling by October 18, 2021, the Treasury Department will run out of cash and extraordinary measures to avoid defaulting on its obligations. This could trigger a financial crisis that would affect not only the US economy, but also the global economy, especially the G7 nations.
What are the G7 nations?
The G7 or the Group of Seven is a group of the seven most advanced economies as per the International Monetary Fund (IMF). The seven countries are Canada, the USA, the UK, France, Germany, Japan and Italy . They represent about 40% of global GDP and 10% of global population.
The G7 was formed in response to the economic woes stemming from the 1973 oil crisis. It started out in 1975 as the Group of Six (G6) by the leaders of France, West Germany, Italy, Japan, the UK, and the US—the seventh nation, Canada, joined the following year. Russia joined in 1998, and the group was temporarily renamed the G8 until the country was booted out after it annexed Crimea in 2014.
The G7 meets annually to discuss and coordinate policies on various issues, such as trade, climate change, security, health and development. The host country sets the agenda and invites other countries or organizations to participate as guests. The most recent G7 summit was held in June 2021 in Cornwall, UK. The next one will be held in May 2023 in Hiroshima, Japan.
Why does the US debt ceiling matter for the G7?
The US is the world’s largest economy and a major trading partner for many countries. It also issues the US dollar, which is the dominant reserve currency and medium of exchange for international transactions. Therefore, any disruption or uncertainty in the US financial system could have significant spillover effects on other economies.
The US debt ceiling crisis could have several negative consequences for the G7 economies:
– It could undermine confidence in the US government’s ability to honor its debts and obligations, which could lead to higher borrowing costs and lower credit ratings for both the US and its allies.
– It could cause volatility and panic in global financial markets, which could trigger a sell-off of US Treasuries and other assets, a flight to safe havens such as gold or cryptocurrencies, and a sharp depreciation of the US dollar against other currencies.
– It could reduce global demand and growth by weakening consumer and business spending in the US and abroad, as well as disrupting trade flows and supply chains that rely on US imports and exports.
– It could exacerbate existing challenges and risks for the G7 economies, such as inflationary pressures, labor shortages, energy crises, geopolitical tensions, and pandemic recovery.
What can the G7 do to prevent or mitigate the impact of the US debt ceiling crisis?
The G7 leaders have expressed their concern over the potential dire consequences if the US were to fail to resolve the impasse, which could tip its economy into recession. They have urged Congress to act swiftly and responsibly to raise or suspend the debt ceiling before it is too late.
The G7 can also take some steps to prepare for and cope with any possible fallout from the US debt ceiling crisis:
– They can coordinate their fiscal and monetary policies to provide stimulus and support to their economies and financial systems in case of a shock or slowdown.
– They can diversify their foreign exchange reserves and portfolios to reduce their exposure and dependence on US assets and currency.
– They can strengthen their cooperation and communication with other countries and organizations to maintain stability and order in global markets and institutions.
– They can reaffirm their commitment to multilateralism and global governance to address common challenges and opportunities in a post-pandemic world.