NIIGATA: The risk of a US default is adding to problems facing the slowing global economy, with rising interest rates and high debt levels already choking back investments needed to fuel higher output, World Bank President David Malpass said on Friday.
Group of Seven (G7) finance officials meeting in Japan discussed the “very high importance” of raising the US debt limit and averting the negative repercussions of a potential default on US government debt for the first time ever.
“Clearly, distress in the world’s biggest economy would be negative for everyone,” he told Reuters on the sidelines of the G7 meeting. “The repercussions would be bad to not get it done.”
US Treasury Secretary Janet Yellen on Friday reiterated that failure by Congress to raise the $31.4 trillion debt limit would result in economic and financial catastrophe, and urged the Republican-controlled House of Representatives to agree to lift the federal debt limit.
Malpass said there had been discussion during the G7 meetings about the need to boost productivity and growth, and also deal with a high debt overhang facing a growing number of countries.
Global growth was slated to fall below 2% in 2023, and could stay low for several years, he said. One of the big challenges was that advanced economies had taken on so much debt that it would take a lot of capital to service it, leaving too little investment for developing countries, he said.
“And that means a prolonged period of slow growth. That’s a big worry, and especially for people in poorer countries,” he said. “The world’s in a stressful spot, but I think the financial systems are holding up. The big question is growth, how do you get more growth and productivity.”
Malpass said it was urgent to make progress on debt restructuring for countries unable to service their debts. However, he cited progress on Ghana, the fourth country to seek relief under the Group of 20 Common Framework.
He said it was frustrating to see the slow pace of progress on the sovereign debt restructuring front, noting how difficult it was for countries to attract investment until debt restructuring agreements were concluded and implemented.
Malpass said some progress had been made during the first two meetings of a new Global Sovereign Debt Roundtable, which includes China - the world’s largest sovereign creditor – and private sector creditors. A third meeting was now planned in June, he said.
“To actually get to these debt reductions is so important … for poor countries that have hit the wall in terms of unsustainable debt. It’s important to get it done as soon as possible.”