Canada keeping a close on standoff over U.S. debt limit
Canadian companies and institutions that sell products or services or lend money to the U.S. government would feel the impact of a default almost instantly.
Canada’s federal government was watching closely and saying little on May 9 as a high-stakes race against the clock got underway in earnest at the White House, with the health of the global economy hanging in the balance.
President Joe Biden met with congressional leaders, including Speaker Kevin McCarthy, his chief antagonist in a protracted standoff over the debt ceiling — a legislative limit on the U.S. government’s borrowing power.
Treasury Secretary Janet Yellen warned last week that the current ceiling could be reached as early as June 1, at which point the U.S. would not have enough money at its disposal to pay all of its bills.
House Republicans say they won’t agree to raise the limit — once a routine procedural matter, now a frequent and all-too-familiar point of political tension — without significant cuts to government spending.
Following their meeting, Biden said the two sides would continue to meet, including another gathering on May 12 — but he insisted he would not entertain talk of spending cuts without a clean agreement to raise the borrowing limit.
“I’m a born optimist” Biden said when asked why he remains convinced a deal can be reached.
“Everyone in the meeting has understood the risk of default: our economy would fall into a significant recession, it would devastate retirement accounts, increase borrowing costs nearly eight million Americans would lose their jobs and our international reputation would be damaged.”
He said it’s possible but unlikely he would cancel plans to attend G7 meetings in Japan if the dispute persists, describing the impasse as the single most important thing on his agenda.
McCarthy’s message was more dire: he would not be moved. “I was very clear with the president: we have now just two weeks to go,” he said.
Politically, Canada is steering a wide berth. In practical terms, though, it’s in the same boat.
“In many ways, we are like a 51st state — we are joined at the hip with the U.S.,” said Andreas Schotter, a professor of international business at Western University’s Ivey Business School in London, Ont.
Canadian companies and institutions that sell products or services or lend money to the U.S. government would feel the impact of a default almost instantly, Schotter said, to say nothing of the effect on stock markets in both countries.
Interest rates, already on the rise, would shoot higher, hitting taxpayers and private borrowers hard. Demand for money-market securities like treasury bills would fall, hampering the U.S.’s ability to cover its soaring debt costs.
Schotter made clear that he doesn’t expect the U.S. to go off a fiscal cliff, although given the current political climate it will likely get close to the edge.
But for America’s number 1 trading partner and a bilateral relationship that’s worth C$3.25 billion of business on a daily basis, the impact of a default would be deep and far-reaching, he added.
“A U.S. default, no one can afford.”
Despite the stakes, protocol demands that the rest of the world, including Canada, maintain a safe diplomatic distance from the fray.
Associate finance minister Randy Boissonnault would only say on May 9 that the standoff is a “sovereign issue” for the U.S. to deal with itself, although he did note that the G7 finance ministers would be meeting this week in Japan.
“The conversation of the finances, post-pandemic, for all of our democracies is an active conversation, so we’ll leave the United States to decide about its debt ceiling,” Boissonnault said.
