Wednesday, July 13, 2011

ANALYSIS: Why Canadians should care about a U.S. debt default

When even the U.S. Treasury refers to the possibility of a debt default by the American government as "an unprecedented event in American history that would precipitate another financial crisis," that tends to get the world's attention.

The doomsday scenario is certainly scary: A default causes global interest rates to soar as debt priced in the world's most liquid currency comes to be regarded as more risky, banks become more reluctant to lend — even to each other — and debt, the lifeblood of business investment, becomes less available.

As well, stock markets sell off and plunge the world into another recession.

And Canada, as an exporting country doing three quarters of its trade with the U.S., would share in that pain.

"The nuclear option," Peter Buchanan, senior economist at CIBC World Markets, told CBC News, "is certainly something one doesn't really want to think about."

But whether the sky will fall on Canada if lawmakers in its biggest trading partner don't manage to do a deal on raising their debt ceiling, cutting spending and lowering taxes is far from certain. (read more)