Will America’s Debt Crisis have Canadian Aftershocks?
Republicans and Democrats probably will reach a deal to pay America’s bills before the U.S. government runs out of cash at the end of July. Probably.
But if worse comes to worst, here’s a question that few in Washington are asking: What will a U.S. default mean for Canada?
The surprising answer: If a U.S. default does not last very long — that is, less than a few days — it would likely prove surprisingly bullish for Canada.
But if the default extends itself longer, Canada would be dragged down after the United States into a catastrophic failure.
First, it’s important to understand what exactly is at risk. If the debt ceiling is not raised in time, the U.S. government will stop paying its bills sometime after July 22.
Probably, Washington will continue to pay interest on its bonds. But hospitals that have treated Medicare patients, nursing homes that house Medicaid recipients, military and civilian employees of the U.S. government — these and many others will be refused some or all of the money that is owed to them.
That will be a huge shock to the credit-worthiness of the United States. Through most of the 20th century, the U.S. government was the world’s safest risk. That would very suddenly no longer be true, prompting a search for new (and better-governed) safe havens.
Canada is one such safe haven.
Since the debt crisis took serious form last month, the Canadian dollar has gained against the U.S. dollar, more than three cents since mid-June. (And no, it’s not about energy prices. Switzerland is not an energy producer, and the Swiss franc has gained even more against the U.S. dollar.)
While America’s triple-A bond rating has been called into question, Canada’s triple-A rating remains secure — meaning that Canada’s borrowing costs could dip below those of the United States.
However — and it’s an important however — if a U.S. default continues for any substantial length of time, nobody will escape the consequences, Canadians least of all.
The U.S. government is the largest purchaser of goods and services on the planet. If it abruptly ceases paying for its purchasers, the shock will cascade through the global economy.
If the U.S. government does not pay its suppliers, those suppliers won’t be able to pay suppliers of their own — some of them located in Canada.
If unpaid U.S. government suppliers lay off workers, those workers must cut back on their own purchases, including purchases from Canada.
If the cutback in U.S. government activity slows overall U.S. economic growth (already slowed by the rise in energy prices this year), it’s hard to see how Canada does not feel the pain of the slowdown.
Canadian exports to the United States rose 22% in 2010 over the depressed levels of 2009. But a shock in 2011 could stop that progress. Three quarters of Canada’s exports go to the United States, not only energy but manufactures, foods and all kinds of services.
Canadians also sell directly to the U.S. government and to the U.S. military. Canada does not disclose figures for military exports to the United States, but it’s a good estimate that sales amount to somewhere between $1.5-billion and $2-billion annually. If that estimate is correct, we’re looking at potentially $125-million or more in unpaid military receivables over the 30 days after Default Day. And that is just one Canadian industrial sector.
The biggest concern of all is that U.S. government defaults to suppliers could trigger supplier defaults on their financial obligations — sparking another U.S. and international banking crisis.
Divided government in the United States is always a rough-and-tumble business. The Republicans who control the House of Representatives want less spending and taxing than does Barack Obama. Arriving at a compromise between the two parties was never going to be easy.
But the Republican decision to use the threat of default to get their way in negotiations escalated the confrontation in ways rarely before seen in U.S. history. The Republican decision to deploy this terrible threat has pushed the United States — and the world economy — toward a fearsome shock at a time when the world economy cannot afford any more shocks.
For Canadians watching the story unfold on cable TV, the U.S. drama may seem like somebody else’s problem. It’s Canada’s problem, too. Not at first — at first, it will be Canada’s windfall — but soon enough.
Originally Posted at the National Post.