What happens to Canada if the US defaults?

[ssiguy]

Some think the US will default and it looks more likely as Aug 2nd approaches fast. For the sake of argument let's say it does so what are the consequences for Canada?
I'll share my thoughts later but there doesn't seem to be much discussion of what this will do to Canada and of all countries we will be amongst the most profoundly effected. This really is a BIG deal and I'm curious on your thoughts.

[Coldrsx]

China is at far greater exposure than Canada...

[1ajs]

true but the whole world is exposed to it also its going to be ugly for a while if it does happen.........

[reidjr]

Originally Posted by ssiguy

Some think the US will default and it looks more likely as Aug 2nd approaches fast. For the sake of argument let's say it does so what are the consequences for Canada?
I'll share my thoughts later but there doesn't seem to be much discussion of what this will do to Canada and of all countries we will be amongst the most profoundly effected. This really is a BIG deal and I'm curious on your thoughts.

I don't think canada would be the most profoundly effected it will have some impact sure but i don't think it will be as bad some seem to think.

[feepa]

^ ya, I really don't think our # 1 customer being able to buy less because they have to pay higher interest rates will affect us at all lol

I think either way, we are in for a bit of a ride... What happens if certain protect measures are used to solve the problem, slowing US trade with Canada (and others), and trying to use more of their in-house resources?

[telyou]

I feel this may be another stroke of midnight AIG save.

[osmo]

Originally Posted by Coldrsx

China is at far greater exposure than Canada...

Iunno buddy - what will ultimately happen when the USA defaults? a notch down in its credit rating and the immediate raising of interests rates. China will thus have holdings that can be used for more than before. It can call back its holdings for real assents and start stripping America for scrap (I have always thought this was its end goal after it stabilized its own domestic market).

Does China need a healthy USA to buy its stuff, yea sure? But China doesn’t have 76.8% of its economy tied to the USA like Canada. I have said many times once the USA croaks Canada will be back in Recession over night. China has Brazil, India, Russia, and a host of other growing nations that can help fill that void, obviously China would take a hit, but to say it would be to more to the extent of Canada who has 2/3rds of its economy locked with the USA and is bounded by Treaty to continue - so it’s quite laughable, to think were not getting the worse of this.

Of course trusted Mansbride or Robertson would never talk about this, it’s a downer and they are both loaded, they are set to weather this storm. They get equally wealthy bankers to muse about possible problems but rarely are they themselves upfront and direct about the ramifications either.

Two scenarios happen or Canada if the USA can't fix its books

Flight of capital will flee the USA and end up here, Canada with its resources its a bit more stable short term then the basket case USA or Euro.

"Great more capital in Canada"

Well. no wrong, our currency is already trading at record high averages against the US$, this would only push it up further and force the zombie Mark Carney to finally have to raise interest rates. So now you’re left with we local Canadians having to pay more for credit (bad for business, housing), and a high dollar (bad for exports) with our largest export market, virtually broke. In basic terms we're fucked. And as our politicos are off frolicking at their cabins nobody will be blunt and honest about this.

But let me back track here and explain the USA has defaulted before, so this isn't unprecedented. I think 3 times it in its history has, as recently as 1971 when it no longer could meet its Gold margins and Nixon pulled the plug on the Gold standard.

The fear mongering is that it would be the end of the world, this is the noise coming out of the USA media and Govt, but it isn't true (per se). In the best interest of the USA it WOULD be to default be forced to take a sizable haircut NOW, instead kicking the can down the road. Leaving it again for a few years will only make the pain worse, leading to inflation so rampant it would make Mugabe and Zimbabwe blush. The biggest losers in all of this are the American citizens who will be gouged either way.

The media talks about the mess Greece is in but yet America by its numbers and GDP is way worse off. 200 Trillion worth of liabilities its exposed to, this 14.2 Annual debt limit is just the drip in that pan, they still have a 200 trillion dollar hole to try and fill, and will attempt like many in the past to try and inflate the gap.

A deal will get done, the USA is going to be downgraded regardless, Wall-street has said that they won’t be able to come up with deep enough cuts to satisfy the credit raters. This is classic of how empires die, they die because they overspend and can’t keep their books in order. USA is neither immune nor different.

Canada has to start decoupling now, we are already too late. This is why at 24 I am making plans to get the hell out of Canada once I am done school. No Country with budget sucking Boomers and no export market will be an ideal place to live. Canada will be in the gutter for as long as the American fiasco ensues. This talk of a return to stable GDP growth by 2016 is a joke, how can you produce positive GDP if your largest market is in the tanks and a subsequent squeeze on demand for resources follows. Complete nonsense! Canadians will be the ones who lose out 2nd worst on this.

The way I was told is that USA has two routes to go.

Either Argentina or Weimar Germany:

Argentina was forced (in 99-01?) to default went through chaos and then got back on its feet.

Weimar Germany tried to kick the can down the road and well… you know the rest and whom and what came after that.

SO it would be in best interest for the USA to default now, but of course Washington never works in the best interest of the American people - so now say hello to Tea Party+Bauchman, inflation, recession and war.

[Doug]

The US government will not default regardless of the debt ceiling. It has more than enough tax revenue to make interest payments, but would do say by not paying other parties such as its own employees, retirees, military personel, contractors etc. There is also the option of selling liquid US government assets such as mortgage backed securities.

The consquences of the US debt crisis for Canada are uncertain, but probably negative in the short term. Interest rates will rise globally as the risk profile of US government debt rises. Rising uncertainty will stall business investment thereby slowing the recover. Both factors will hurt the Canadian economy. The flipside is that more money will flow into Canada if it is perceived as a safe haven. What remains to be seen is if those inflows are actually directed towards productive capacity (ex. plant and equipment) or simply fallowed (ex. real estate). What is certain is that governments and individuals carrying high debt loads will feel the pinch. Highly leverage provincial governments, basically those from Ontario east are in for a world of pain.

Over the long term the US debt crisis will likely benefit Canada and the global economy as a whole as it will force more rational fiscal and monetary policy. While the crisis is largely manufactured, it is probably the best action taken by the US government in the last decade. Up until now, the electorate was unwilling to take the lumps of higher taxes and reduced government spending. The crisis will force that to happen and may even set up the fall guy that all politicians are looking for: the bond market. So when people scream about the pension age rising, or mortgage deductibility being capped at a lower number, politicians can point to those evil, red suspender wearing bond traders.

Right now I am siding with the Replican proposal as it extracts the most pain before the next election cycle. Any move to forestall meaningfuly spending cuts and tax increases until after the election would be pointless. What is most discouraging is that even the most agressive proposals being tabled only make small dents in the deficit. Bold actions such as pushing both the Medicare and pensions eligibilities to 68, slashing military spending in half, pink slipping 25% of all federal workers, reducing federal worker's benefits, adding a couple percentage points to the top two tax brackets, enacting a 5% VAT and an extra $1 excise tax/gallon of gas are all needed. That still may not be enough to balance the books.

[Kitchissippi]

Originally Posted by osmo

This is why at 24 I am making plans to get the hell out of Canada once I am done school. No Country with budget sucking Boomers and no export market will be an ideal place to live.

Wow, utterly brave and altruistic of you :sarcastic: . Where are you going to hide? The safest places will probably the poorest countries that have nothing left to lose. China despite its outward prosperity is also heavily leveraged internally — it is hard to tell because they have a different way of cooking their books.

[artvandelay]

I haven't been following US politics lately (the amount of childish partinsanship is infuriating) but I have the feeling that this crisis may be a an attempt by the GOP to manufacture an economic slump heading into the next election and pin it on the Obama administration. If so, it is a shame that US politicians are no longer acting for the good of the country rather than their own personal interests.

[someone123]

Yeah, my impression was that they can still make interest payments regardless of whether or not the debt ceiling is raised.

The real issue seems to be that the US in general (politicians and voters) are nowhere near the point of accepting magnitude of sacrifices necessary to reduce deficits and the debt. There's also a risk that any fix will be seriously unbalanced in terms of who accepts the burden of increased costs and lower service levels. Wealth distribution in the US is already poor and there is a growing Third World-style underclass that doesn't seem to be able to support itself.

[osmo]

Originally Posted by Doug

The US government will not default regardless of the debt ceiling. It has more than enough tax revenue to make interest payments, but would do say by not paying other parties such as its own employees, retirees, military personel, contractors etc. There is also the option of selling liquid US government assets such as mortgage backed securities.

The consquences of the US debt crisis for Canada are uncertain, but probably negative in the short term. Interest rates will rise globally as the risk profile of US government debt rises. Rising uncertainty will stall business investment thereby slowing the recover. Both factors will hurt the Canadian economy. The flipside is that more money will flow into Canada if it is perceived as a safe haven. What remains to be seen is if those inflows are actually directed towards productive capacity (ex. plant and equipment) or simply fallowed (ex. real estate). What is certain is that governments and individuals carrying high debt loads will feel the pinch. Highly leverage provincial governments, basically those from Ontario east are in for a world of pain.

Over the long term the US debt crisis will likely benefit Canada and the global economy as a whole as it will force more rational fiscal and monetary policy. While the crisis is largely manufactured, it is probably the best action taken by the US government in the last decade. Up until now, the electorate was unwilling to take the lumps of higher taxes and reduced government spending. The crisis will force that to happen and may even set up the fall guy that all politicians are looking for: the bond market. So when people scream about the pension age rising, or mortgage deductibility being capped at a lower number, politicians can point to those evil, red suspender wearing bond traders.

Right now I am siding with the Replican proposal as it extracts the most pain before the next election cycle. Any move to forestall meaningfuly spending cuts and tax increases until after the election would be pointless. What is most discouraging is that even the most agressive proposals being tabled only make small dents in the deficit. Bold actions such as pushing both the Medicare and pensions eligibilities to 68, slashing military spending in half, pink slipping 25% of all federal workers, reducing federal worker's benefits, adding a couple percentage points to the top two tax brackets, enacting a 5% VAT and an extra $1 excise tax/gallon of gas are all needed. That still may not be enough to balance the books.

^ I agree with a good chunk of what you say but I don't think it is a lovely and nice as you put it out to be (neither as doom nor gloom either).

As we both agree a deal will get done, the USA won't take the necessary bold steps to fix the problem now so 'more pain later' is the mantra. The one thing little talk is going on about is oil and its subsequent pricing in US$, Oil will become greatly more expensive for everybody but more so for the people who need it most. This might become a messy situation as the OPEC cabal tries to break its self off from losses.

Next is the game of chicken with Europe, it is simply a game of Hot potato between the USA or Euro to whom will hit the daises first. For the longest time I thought the Euro would toss its cookies first but now after viewing trends such as China INCREASING its exposure to the Euro, markets are simply just taking the least ugly of the two sisters. So now my views are reversed and we may actually see the USA structurally become a mess first.

Next these MBS assets that the USA Gov't is sitting on probably aren’t even worth the paper they are printed on. Fannie and Freddie MAC where the bulk of this are stored in are complete broke jokes, the Gov't has yet to bring this prized pig into the picture. Any worthwhile assets will have to be pawned of on the cheap, USA real estate has lost 60% of its value in recent years and the USA govt is largest holders of MBS. You can see where that will lead.

And lastly neither Party is worthwhile in this mess. It is basically a game of chicken to who will get blamed for putting the last nail into the American middle class. how so because on the Democratic proposal on Friday which got turned down, republican played political theater when Obama offered such a large ‘GOP stuffed’ plan with cuts twice-to three times as deep as the Republicans had offered they turned it down simply to not be 'out-manned' 'out-neo-conned' Whatever you want to call it, Pure nonsense. They are acting like children, I have believed they have had a deal set a along and are just drawing this out to make sure one gets the upper hand in the very end. They both agree on the same principals to gut left and right everything they can. But both sides are lazy and are not getting to the root of the problem.

The GOP doesn’t want tax hikes and yes no amount of tax revenues will get America in the green. But there reasons for not increasing taxes are foolish. The American tax rates should at least be more level to the point where the middle class isn't shouldering some 60%+. Defense cuts are not deep enough, it takes up such a large part of the budget, these negotiations are for the Disney channel until they can address defense spending properly.

[Doug]

Agree that liquidating MBS would likely occur substantially below face value and would drive up yields on all MBS. It would be ugly, but it is an option,

Also agree that any deal that happens within the next week will likely be insufficient and not much more than a stall tactic.

Where I disagree is that US debt is any worse than Japanese or European debt. They are all basket cases. Maybe the most favorable outcome would be for one of the PIIGS (probably Greece) to default this week as an impetus for Congress and the President to be scared into meaningful action.

[Highinthesky]

Can we get a poll asking people if they actually think the U.S. will default on their debt service charges? That way I'll know if its worth reading through this thread.

[osmo]

Originally Posted by Kitchissippi

Wow, utterly brave and altruistic of you :sarcastic: . Where are you going to hide? The safest places will probably the poorest countries that have nothing left to lose. China despite its outward prosperity is also heavily leveraged internally — it is hard to tell because they have a different way of cooking their books.

Call me a coward if you really want, I could care less. My parents escaped war and crap economic situations in West Africa to come here. The way I view it I only owe it to my family to put myself in the best situation to succeed and help them out and provide a stable backing for my own future family also -It is already known that here in the West the next generation will live poorer than their parents. Why should I be so selfish to burden my children with debts, uncertainty, and high costs?

There is no long term game here, Canada has put all its chips in the USA experiment and will have to pay the price for it when the balloon pops. We have our own debt issues and a demographics squeeze which will stress our budgets.

Why stay here for the prime money making years of my life (25-55) when things will be on the downward trend?

Lets understand that many "third world" (outdated term which has no relevance now) have taking their haircuts. Many of these nations were fleeced by America or Western Europe or we're crushed when the USSR hit the can. Many have re-organized their economies and have stable Macro-economic principles in place. Is everybody rich there? Far from it, but an upward trend that is seen in these places is more positive than the downward trend we are about to experience here. Going there with skills, desirable education, wealth, and tenacity will ensure success.

I have friends in China and India and they are living very well, that's not my style though. You will find me in South America (Brazil or Chile), or South Africa. Scandinavia is where I plan to do grad school (I appreciate how some of its nations are not totally engulfed into the Eurozone; i.e. Sweden). For what I am doing in school there will always be work, it will just be a matter of me finding it.

You follow the money; money has been flowing into emerging markets for over a decade now. American Capital flees the USA and ends up there. I'll follow the money and will be fine. Have your feeding tubes and adult diapers. I'll take the beach and a good paying job.

[osmo]

Originally Posted by Doug

Agree that liquidating MBS would likely occur substantially below face value and would drive up yields on all MBS. It would be ugly, but it is an option,

Also agree that any deal that happens within the next week will likely be insufficient and not much more than a stall tactic.

Where I disagree is that US debt is any worse than Japanese or European debt. They are all basket cases. Maybe the most favorable outcome would be for one of the PIIGS (probably Greece) to default this week as an impetus for Congress and the President to be scared into meaningful action.

Its a big game of musical chairs. I agree the USA is not Japan with almost 500% of total-Debt-to-GDP, but 280% which America stands at isn't idea either.

All western nations are cooked, we over leveraged and borrowed with crippling debts left to tackle and aging populations.

Interesting thing I read on Greece today is that some of the credit raters are ready to downgrade America whiten a 3day window, but Greece the basket case and mess it is will not be touched.

Aside from Greece a tiny little nation of nothing, or no value the EU sweats at night that Spain, Italy and France may be next to toss over their cookies next. Italy makes Greece look like a small fry, California has a larger GDP than Greece and it has just as much a chance of defaulting as Greece.

That is another thing that isn't being discussed either. this whole mess greatly effects how State governments. They will be paying more for their own debt and they are already on the brinks with a broke Federal Gov't unable to bail them out, look to see the Feds shift a lot of burden onto the States to keep Federal lawmakers from being chased down in the streets.

Yikes I'm typing to much here, but this is interesting stuff to me. Global economics and politics has been of interest for me for a long time, its intriguing (and sometimes scary) stuff!

[Jamaican-Phoenix]

Canada seems more stable than the US with regards to matters like this and while we're certainly going to be affected, I see a repeat more or less of 2008 and a speedy Canadian recovery.

[jlousa]

As someone trained in economics, I've been enjoying reading this thread as it's made me chuckle. The truth is as some have stated is nothing will change. The facts are most other countries are in similiar boats, and as such there will not be a mass exodus of capital from the US.
They will raise the debt ceiling, they will raise taxes and they will implement cutbacks and they will be fine. The US was running surpluses only a decade ago and can again today with the right willpower.
I don't think we will experience much change in our interest rates either but instead will see the government take other steps to keep our dollar low.
I wouldn't be fleeing Canada personally as there isn't a single country out there that have better longterm appeal.

[MrOilers]

Originally Posted by osmo

Have your feeding tubes and adult diapers. I'll take the beach and a good paying job.

But where are you going to get your feeding tubes and adult diapers?

[Doug]

Originally Posted by osmo

That is another thing that isn't being discussed either. this whole mess greatly effects how State governments. They will be paying more for their own debt and they are already on the brinks with a broke Federal Gov't unable to bail them out, look to see the Feds shift a lot of burden onto the States to keep Federal lawmakers from being chased down in the streets.

US states cannot borrow money for non-capital items, similar to Canadian municipalities, which is why they are in perennial buget crises. This is a good thing as it forces hard decisions to be made now instead of pushing the problem off to future generations. This is why California facing a $25B budget shortfall is newsworthy while Ontario actually incurring a $25B budget shortfall is not. A downgrade of the US federal credit rating will likely hit the states as well, but only on their capital financing. Canada is in good shape at the federal level, but all in public debt (federal+provincial+municipal+crown corporation) is similar. Inclusion of off balance sheet liabilities such as future pension and healthcare benefits probably puts the US in a worse situation, but such items are challenging to quantify.