Digital Zeitgeist – US Markets – Yellen Will Bring The Debt Ceiling The Financial Crisis and The Tax Crisis to the G7
Washington, D.C./Japan, May 10 (Reuters) – This week, Treasury Secretary Janet Yellen will attend the G7 finance summit in Japan, but her ambitious economic agenda has been derailed by an acrid partisan battle over the country’s debt ceiling that threatens to trigger a new financial crisis and a landmark tax agreement that Republicans have obstructed.
Yellen spent the whole previous year leading the G7-led sanctions against Russia for its invasion of Ukraine. She will probably spend most of the two-day conference in Niigata assuring the same group that the United States would not cause a payments default to destroy the world economy.
The change demonstrates how severely U.S. partisan differences may resonate throughout the world and thwart the global economic objectives of the Biden administration.
“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.
It has become more challenging for Yellen to fulfil Democratic commitments made in multilateral discussions, such as the United States’ participation in the 15% global minimum corporation tax, for which she obtained support in 2021, as a result of Republicans’ control of the House of Representatives since January.
“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.
Prior to a crucial meeting with President Joe Biden on Tuesday, Republican House Speaker Kevin McCarthy claimed that some expenditure cuts on the debt ceiling were required to avoid the U.S. deficit from spiralling out of control and that 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 the 1st of June. She will warn about “the global impact of this standoff and highlight the need to avoid default,” a senior Treasury official said.
The basis of the international financial system is the U.S. bond market, with the dollar serving as the reserve currency and Treasury debt long recognised as the safest and most liquid financial asset in the world, a status Yellen said would be jeopardised in the event of a default.
She will also need to persuade the G7 finance ministers and central bank governors that pressures on regional lenders in the United States won’t spiral out of control following a third significant bank failure, which will merely exacerbate problems.
In order to personally phone American business executives and make appearances on numerous top television programmes, Yellen postponed her trip to Japan and warned U.S. senators that failing to raise the $31.4 trillion borrowing ceiling would result in a “catastrophe” for the world’s financial markets and the economy.
PUBLIC WARNINGS, PRIVATE ASSURANCES?
Former senior IMF official Martin Muehleisen expressed his belief that Yellen will exercise caution when speaking with her G7 counterparts in private meetings so as not to imply that a default is probable or even plausible, given the potential uproar that may result.
“All hell will break loose on the day they stop paying their bills. It will lead to a freeze in global financial markets,” said Muehleisen, now a fellow with the Atlantic Council.
He asserted that he believes Yellen will likely address various backup plans, such as using the 14th Amendment to overrule Congress, which states that the legitimacy of U.S. debt “shall not be questioned.” Yellen has stated that this is not the best course of action.
TAX DEAL, SOVEREIGN DEBT
Experts predicted that the coming sovereign debt crisis and the probable debt default in the United States would be overshadowed by these issues, together with Japan’s efforts to reduce its reliance on China in its supply chains.
G7 colleagues will ask Yellen questions on the threats to the country’s financial stability and the exposure of regional banks to commercial real estate. Stephanie Segal, a senior scholar at the Centre for Strategic and International Studies in Washington and a former U.S. Treasury official, said: “Real risks that are not manufactured for political posturing.”
Republicans in Congress and Democratic Senator Joe Manchin have prevented the United States from ratifying the 15% global corporate minimum tax that 137 countries have agreed to, but other countries are already enforcing it. Due to the gap, American businesses may be subject to “top-up” taxes from other countries whose tax rates are lower than 10%.
The division also implies that Yellen’s long-term ambition of waging a coordinated campaign against inequality is no longer feasible.
The much more complex “Pillar 1” plan, which would let nations tax multinational technology companies and other highly successful businesses on their local sales, is still being negotiated.
According to Danielle Rolfes, a former U.S. Treasury official who now leads KPMG’s Washington national tax practice, Yellen would likely push for prolonging a moratorium on digital services taxes at the end of 2023.
“I do think they are negotiating in good faith, I think they need more time,” Rolfes said.
But she said that any Pillar 1 deal would likely need a two-thirds Senate majority treaty vote, which looks impossible at the moment, and “there is no Pillar 1 without the U.S.”
The year 2025 is when Congress will be obliged to overhaul the whole U.S. tax code because of the expiration of individual tax cuts passed in 2017, represents the best chance for any progress on global tax concerns.
online sources: theguardian.com, reuters.com