<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="820" height="462" src="https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107245391-1684857280396-gettyimages-1257503956-US_DEBT_LIMIT-820x462.jpeg" alt="" class="wp-image-425102" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107245391-1684857280396-gettyimages-1257503956-US_DEBT_LIMIT-820x462.jpeg 820w, https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107245391-1684857280396-gettyimages-1257503956-US_DEBT_LIMIT-300x169.jpeg 300w, https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107245391-1684857280396-gettyimages-1257503956-US_DEBT_LIMIT-160x90.jpeg 160w, https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107245391-1684857280396-gettyimages-1257503956-US_DEBT_LIMIT-768x432.jpeg 768w, https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107245391-1684857280396-gettyimages-1257503956-US_DEBT_LIMIT.jpeg 929w" sizes="auto, (max-width: 820px) 100vw, 820px" /><figcaption class="wp-element-caption">The US Capitol building in Washington, DC, US, on Tuesday, May 23, 2023. Debt-limit negotiators will meet this morning in Washington as President Joe Biden and House Speaker Kevin McCarthy remained without an agreement to avert a catastrophic US default with time running short. Nathan Howard | Bloomberg | Getty Images</figcaption></figure>



With days to spare before a potential first-ever government default, President Joe Biden and House Speaker Kevin McCarthy reached final agreement Sunday on a deal to raise the nation’s debt ceiling and worked to ensure enough Republican and Democratic votes to pass the measure in the coming week.



The Democratic president and Republican speaker spoke with each other Sunday evening as negotiators rushed to draft the bill text so lawmakers can review compromises that neither the hard-right or left flank is likely to support. Instead, the leaders are working to gather backing from the political middle as Congress hurries toward votes before a June 5 deadline to avert a damaging federal default.



“Good news,” Biden declared Sunday evening at the White House.



“The agreement prevents the worst possible crisis, a default, for the first time in our nation’s history,” he said. “Takes the threat of a catastrophic default off the table.”



The president urged both parties in Congress to come together for swift passage. “The speaker and I made clear from the start that the only way forward was a bipartisan agreement,” he said.



The compromise announced late Saturday includes spending cuts but risks angering some lawmakers as they take a closer look at the concessions. Biden told reporters at the White House upon his return from Delaware that he was confident the plan will make it to his desk.



McCarthy, too, was confident in remarks at the Capitol: “At the end of the day, people can look together to be able to pass this.”



The days ahead will determine whether Washington is again able to narrowly avoid a default on U.S. debt, as it has done many times before, or whether the global economy enters a potential crisis.



In the United States, a default could cause financial markets to freeze up and spark an international financial crisis. Analysts say millions of jobs would vanish, borrowing and unemployment rates would jump, and a stock-market plunge could erase trillions of dollars in household wealth. It would all but shatter the $24 trillion market for Treasury debt.



Anxious retirees and others were already making contingency plans for missed checks, with the next Social Security payments due soon as the world watches American leadership at stake.



McCarthy and his negotiators portrayed the deal as delivering for Republicans though it fell well short of the sweeping spending cuts they sought. Top White House officials were briefing Democratic lawmakers and phoning some directly to try to shore up support.



As Sunday dragged on, negotiators labored to write the bill text and lawmakers raised questions.



McCarthy told reporters at the Capitol on Sunday that the agreement “doesn’t get everything everybody wanted,” but that was to be expected in a divided government. Privately, he told lawmakers on a conference call that Democrats “got nothing” they wanted.



A White House statement from the president, issued after Biden and McCarthy spoke by phone Saturday evening and an agreement in principle followed, said the deal “prevents what could have been a catastrophic default.”



Support from both parties will be needed to win congressional approval before a projected June 5 government default on U.S. debts. Lawmakers are not expected to return to work from the Memorial Day weekend before Tuesday, at the earliest, and McCarthy has promised lawmakers he will abide by the rule to post any bill for 72 hours before voting.



Negotiators agreed to some Republican demands for increased work requirements for recipients of food stamps that House Democrats had called a nonstarter.



With the outlines of an agreement in place, the legislative package could be drafted and shared with lawmakers in time for House votes as soon as Wednesday, and later in the coming week in the Senate.



Central to the compromise is a two-year budget deal that would essentially hold spending flat for 2024, while boosting it for defense and veterans, and capping increases at 1% for 2025. That’s alongside raising the debt limit for two years, pushing the volatile political issue past the next presidential election.



Driving hard to impose tougher work requirements on government aid recipients, Republicans achieved some of what they wanted. It ensures people ages 49 to 54 with food stamp aid would have to meet work requirements if they are able-bodied and without dependents. Biden was able to secure waivers for veterans and homeless people.



The deal puts in place changes in the landmark National Environmental Policy Act designating “a single lead agency” to develop environmental reviews, in hopes of streamlining the process.



It halts some funds to hire new Internal Revenue Service agents as Republicans demanded, and rescinds some $30 billion for coronavirus relief, keeping $5 billion for developing the next generation of COVID-19 vaccines.



The deal came together after Treasury Secretary Janet Yellen told Congress that the United States could default on its debt obligations by June 5 — four days later than previously estimated — if lawmakers did not act in time. Lifting the nation’s debt limit, now at $31 trillion, allows more borrowing to pay bills already insurred.



McCarthy commands only a slim Republican majority in the House, where hard-right conservatives may resist any deal as insufficient as they try to slash spending. By compromising with Democrats, he risks losing support from his own members, setting up a career-challenging moment for the new speaker.



“I think you’re going to get a majority of Republicans voting for this bill,” McCarthy said on “Fox News Sunday,” adding that because Biden backed it, “I think there’s going to be a lot of Democrats that will vote for it, too.”



House Democratic leader Hakeem Jeffries of New York said on CBS’ “Face the Nation” that he expected there will be Democratic support but he declined to provide a number. Asked whether he could guarantee there would not be a default, he said, “Yes.”



A 100-strong group of moderates in the New Democratic Coalition gave a crucial nod of support on Sunday, saying in a statement it was confident that Biden and his team “delivered a viable, bipartisan solution to end this crisis” and were working to ensure the agreement would receive support from both parties.



The coalition could provide enough support for McCarthy to make up for members in the right flank of his party who have expressed opposition before the bill’s wording was even released.



It also takes pressure off Biden, facing criticism from progressives for giving into what they call hostage-taking by Republicans.



Democratic Rep. Pramila Jayapal of Washington state, who leads the Congressional Progressive Caucus, told CBS that the White House and Jeffries should worry about whether caucus members will support the agreement.

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<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="820" height="462" src="https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107120869-1663619761616-gettyimages-1243369951-CLINTON_GLOBAL_INITIATIVE-820x462.jpeg" alt="" class="wp-image-424945" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107120869-1663619761616-gettyimages-1243369951-CLINTON_GLOBAL_INITIATIVE-820x462.jpeg 820w, https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107120869-1663619761616-gettyimages-1243369951-CLINTON_GLOBAL_INITIATIVE-300x169.jpeg 300w, https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107120869-1663619761616-gettyimages-1243369951-CLINTON_GLOBAL_INITIATIVE-160x90.jpeg 160w, https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107120869-1663619761616-gettyimages-1243369951-CLINTON_GLOBAL_INITIATIVE-768x432.jpeg 768w, https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107120869-1663619761616-gettyimages-1243369951-CLINTON_GLOBAL_INITIATIVE.jpeg 929w" sizes="auto, (max-width: 820px) 100vw, 820px" /><figcaption class="wp-element-caption">Ngozi Okonjo-Iweala, director general of the World Trade Organization (WTO), speaks during the Clinton Global Initiative (CGI) annual meeting in New York, on Monday, Sept. 19, 2022. Michael Nagle | Bloomberg | Getty Images</figcaption></figure>



World Trade Organization Director-General Ngozi Okonjo-Iweala urged diversification in global supply chains, amid ongoing efforts to progress the body’s reform.



“There is an overconcentration of manufacturing in certain sectors in certain countries,” she told CNBC’s Martin Soong on the sidelines of the latest weekend summit of G-7 (Group of Seven) major economic powers in Hiroshima, Japan. “I agree that we need to build resilience, that the world cannot be reliant on a few countries for a few key products.”



She gave the examples of pharmaceuticals and the dearth of Covid-19 vaccine available to certain importing regions, as producers introduced export restrictions during the pandemic. She also referenced the worldwide shortage of critical semi-conductor chips, which has created bottlenecked manufacturing in the technological and automotive industries.



The WTO’s chief pitched the dual benefits of pursuing diversification in developing countries to simultaneously boost their economic growth and meet global supply requirements.



“Let’s reglobalize by situating diversifying industries into these countries. We kill two birds with one stone. One is we build global resilience beyond just our neighbors and our friends, because you never know who is your friend. Your friend today can be not your friend tomorrow,” she argued.



“Let’s look for those areas where we have the right environment, diversify and use that to bring them in from the margin into the global system. That will re-spur growth in those countries and in the world.”



The emphasis on “reglobalization” comes as geopolitical tensions and recent U.S. legislation have stoked worries over the potential fragmentation of global trade.



The U.S. Inflation Reduction Act — a sweeping green package of tax, health and climate legislation signed by President Joe Biden in August last year — introduced subsidies to galvanize the domestic production of electric vehicles, at the same time unlocking “serious concerns” within the European Union over the outlook for their own exported goods.



The fate of Western trade with key manufacturing hub China has also come under question, although G-7 leaders explicitly restated they are not pursuing a policy of economic decoupling from Beijing in their latest communique of Saturday.



“Our policy approaches are not designed to harm China nor do we seek to thwart China’s economic progress and development. A growing China that plays by international rules would be of global interest. We are not decoupling or turning inwards. At the same time, we recognize that economic resilience requires de-risking and diversifying,” they said, nevertheless noting the need to take collective and individual steps to invest in their own “economic vibrancy” and dwindle “excessive dependencies in our critical supply chains.”



The WTO faces struggles closer to home, amid bids to reform one tier of its global trade dispute settlement system, the Appellate Body, which the U.S. Trade Representative’s office in February 2020 accused of “persistent overreaching” and extending its own power “at the expense of the authority of the United States and the other WTO members.”



The Appellate Body has been effectively paralyzed following the U.S. blockage of adjudicator appointments in recent years.



“Our goal is a fully functioning (dispute system) by 2024,” Deputy United States Trade Representative Maria Pagan told Reuters in January. The WTO’s Okonjo-Iweala said Washington and other countries have been engaging in dialogue to overhaul the Appellate Body, stressing her desire to “move beyond the discussion to specific proposals.”



Asked about reports over an U.S. reform suggestion that both the plaintiff and the defendant must agree before moving a dispute to the attention of the Appellate Body, the director-general said that such a pitch had yet to materialize as a formal proposal.



“I think those are some ideas maybe that people might have heard, the U.S. talk about, and so on. But we don’t have proposals yet on paper.”



The WTO is set to hold its next Ministerial Conference — the so-styled MC13 — in February 2024.



“We may not have completed the reform by then,” she noted, nevertheless adding, “I hope and expect that we will have done a great deal of work that will show that the organization is moving purposefully towards reforming that system.”

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<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="820" height="547" src="https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107243047-1684379482574-gettyimages-1490951116-dsc00150_wydzrwkm-820x547.jpeg" alt="" class="wp-image-424904" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107243047-1684379482574-gettyimages-1490951116-dsc00150_wydzrwkm-820x547.jpeg 820w, https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107243047-1684379482574-gettyimages-1490951116-dsc00150_wydzrwkm-300x200.jpeg 300w, https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107243047-1684379482574-gettyimages-1490951116-dsc00150_wydzrwkm-135x90.jpeg 135w, https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107243047-1684379482574-gettyimages-1490951116-dsc00150_wydzrwkm-768x512.jpeg 768w, https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107243047-1684379482574-gettyimages-1490951116-dsc00150_wydzrwkm-1536x1024.jpeg 1536w, https://cms.cnbcafrica.com/wp-content/uploads/2023/05/107243047-1684379482574-gettyimages-1490951116-dsc00150_wydzrwkm-scaled.jpeg 2048w" sizes="auto, (max-width: 820px) 100vw, 820px" /><figcaption class="wp-element-caption">HIROSHIMA, JAPAN &#8211; MAY 17: People walk beneath a banner promoting the Group of 7 (G7) summit at a shopping street on May 17, 2023 in Hiroshima, Japan. The G7 summit will be held in Hiroshima from 19-22 May. (Photo by Tomohiro Ohsumi/Getty Images) Tomohiro Ohsumi | Getty Images News | Getty Images</figcaption></figure>



The global debt pile grew by $8.3 trillion in the first quarter to a near-record high of $305 trillion as the global economy faced a “crisis of adaptation” to rapid monetary policy tightening by central banks, according to a closely-watched report from the Institute of International Finance.



The finance industry body said the combination of such high debt levels and rising interest rates has driven up the cost of servicing that debt, triggering concerns about leverage in the financial system.



Central banks around the world have been hiking interest rates for over a year in a bid to rein in sky-high inflation. The U.S. Federal Reserve earlier this month lifted its fed funds rate to a target range of 5%-5.25%, the highest since August 2007.



“With financial conditions at their most restrictive levels since the 2008-09 financial crisis, a credit crunch would prompt higher default rates and result in more ‘zombie firms’ — already approaching an estimated 14% of U.S.-listed firms,” the IIF said in its quarterly Global Debt Monitor report late Wednesday.



The sharp increase in the global debt burden in the three months to the end of March marked a second consecutive quarterly increase following two quarters of steep declines during last year’s run of aggressive monetary policy tightening. Non-financial corporates and the government sector drove much of the rebound.



“At close to $305 trillion, global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly: Despite concerns about a potential credit crunch following the recent turmoil in the banking sectors of the U.S. and Switzerland, government borrowing needs remain elevated,” the IIF said.



The Washington, D.C.-based organization said aging populations, rising health care costs and substantial climate finance gaps are exerting pressure on government balance sheets. National defense spending is expected to increase over the medium term due to heightened geopolitical tensions, which would potentially affect the credit profile of both governments and corporate borrowers, the IIF projected.



“If this trend continues, it will have significant implications for international debt markets, particularly if interest rates remain higher for longer,” the report noted.



Total debt in emerging markets hit a new record high of more than $100 trillion, around 250% of GDP, up from $75 trillion in 2019. China, Mexico, Brazil, India and Turkey were the largest upward contributors.



In developed markets, Japan, the U.S., France and the U.K. posted the sharpest increases over the quarter.



<h3 class="wp-block-heading" id="h-banking-turmoil-and-a-crisis-of-adaptation">Banking turmoil and a ‘crisis of adaptation’</h3>



The rapid monetary policy tightening exposed frail liquidity positions in a number of small and mid-sized banks in the U.S. and led to a series of collapses and bailouts in recent months. The ensuing market panic eventually spread to Europe and forced the emergency sale of Swiss giant Credit Suisse to UBS.



The IIF suggested that corporations have undergone a “crisis of adaptation” to what it termed a “new monetary regime.”



“Although recent bank failures appear more idiosyncratic than systemic — and U.S. financial institutions carry much less debt (78% of GDP) than in the run-up to the 2007/8 crisis (110% in 2006) — fear of contagion has prompted significant deposit withdrawals from U.S. regional banks,” the IIF said.



“Given the central role of regional banks in credit intermediation in the U.S., worries about their liquidity positions could result in a sharp contraction in lending to some segments, including underbanked households and businesses.”



This contraction of credit conditions could particularly affect small businesses, the IIF said, along with causing higher default rates and more “zombie firms across the board.”



Zombie firms are companies with earnings that are sufficient to allow it to continue operating and pay the interest on its debt, but not to pay off the debt, meaning any cash generated is immediately spent on debt. The company is therefore “neither dead nor alive.”



“We estimate that around 14% of U.S. companies can be considered zombies, with a substantial portion of these in the healthcare and information technology sectors.”

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Global debt nears record highs as rate hikes trigger ‘crisis of adaptation,’ top trade body says

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