Canada's Debt Ceiling Fears: What A Default In Washington Means For Canadians

First Posted: 07/27/11 09:20 AM ET   Updated: 09/26/11 06:12 AM ET

If Americans are experiencing feelings of helplessness over the political wrangling that is keeping Washington from raising its debt ceiling in the face of a fast-approaching deadline, they should try watching the drama unfold from this side of the border. Despite the fact that Canadians have no control over what happens in Washington, if an agreement is not reached by Aug. 2, to raise the annual amount of debt needed to fund government spending, we will no doubt share in the consequences.

“We are connected to the U.S., to their political decisions,” says James Marple, a senior economist at TD Economics.

As Marple points out, through exports alone, roughly one-fifth of the Canadian economy is “directly impacted by what’s happening south of the border.” Factor in things like financial and commodity markets, and, he says, “the entire impact is probably much, much greater.”

So how worried should we be? Despite the suggestion that missing the deadline would trigger an economic catastrophe of Lehman Brothers proportions, experts told The Huffington Post Canada that the likelihood of a U.S. debt default is slim.

See the six reasons below

“This is an entirely avoidable issue and completely self-inflicted,” says BMO chief economist Douglas Porter. “Just as it is entirely self-inflicted, the issue can be put away rather quickly if cooler heads do ultimately prevail. I don’t think any of us want to find out exactly what the real deadline is, but I don’t think the earth is going to stop rotating on August 2.”

That said, the failure to broker a deal in a timely fashion would likely lead to fallout on both sides of the border. So intertwined are our economies that depending on what the next week brings, average Canadians could experience a shift in everything from their buying power to their job prospects.

But Canadians may be surprised to know that it’s not all bad news. Here’s a preview of what continued unrest in Washington could mean for you.

1. The value of our dollar
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The Canadian dollar surpassed $1.06 (U.S.) against the greenback Tuesday, not far off historic highs. And if Washington doesn't reach an agreement over the debt ceiling before its bills come due, economists say the loonie could soar even higher -- at least in the short term. As University of Toronto economist Jack Carr explains, the perception among international investors of the Canadian dollar as relatively risk-free is a large part of what has been sending its value skyward. "It used to be that the primary [safe haven] was the U.S. dollar, and the secondary was the Euro," he says. But according to BMO Chief Economist Douglas Porter, if the crisis were to deepen -- or if a U.S. debt default occurred -- the strength of the loonie (and the increased buying power for consumers) would fade. "If there is real economic damage done to the global economy, that would undercut commodity prices, which in turn could lead to a weakening of the Canadian dollar," he says.
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