Political chaos in Washington has experts urging Ottawa to start planning for a possible debt default by the United States that would cause unknown damage to the world’s reserve currency.
The U.S. government entered a partial shutdown Tuesday after Congress failed to reach a deal on a spending plan for the new fiscal year. But a far more serious deadline looms on Oct. 17, when Congress must raise the government’s debt ceiling to prevent defaults.
“This [shutdown] is uncomfortable, but the debt ceiling is really quite unknown territory,” said John Manley, who was Canada’s industry minister during the last U.S. government shutdown in 1995-1996 and also helped lead Ottawa’s security response to the terrorist crisis of Sept. 11, 2001.
Now president of the Canadian Council of Chief Executives, Mr. Manley said he expects Ottawa is preparing for the worst.
“They’re undoubtedly contemplating what happens if the debt ceiling cap is reached and what that could mean in terms of some flight to Canadian government bonds, which would have the impact – one would assume – of the Canadian dollar rising,” he said.
In that scenario, he said the Conservative government would have to consider shelving plans to balance the books in favour of new stimulus spending.
Prime Minister Stephen Harper’s government is scheduled to present a Throne Speech on Oct. 16. That would be followed at some point by a fall economic update, which on rare occasions can include policy measures in the form of a mini-budget.
Most observers continue to discount the possibility of a long debt-ceiling impasse.
CIBC World Markets economist Avery Shenfeld said it would be “political suicide” for Republicans to risk being seen as pushing the shutdown beyond October.
But after Congress missed Monday’s deadline on a spending plan, doubt is creeping in as to what’s next.
“People didn’t think we’d be where we are at today,” said Colin Robertson, a former Canadian diplomat who specializes in Canada-U.S. relations. “Contingency planning is always a good thing, especially when you’re dealing with the irrational, which is really what we’re dealing with in the United States.”
A spokesperson for Finance Minister Jim Flaherty declined to comment when asked whether the minister is preparing a response to a debt-ceiling impasse.
“We will continue to monitor all global economic situations carefully,” the minister said in a statement. In the past, Mr. Flaherty has said that in the event of a new economic shock, Ottawa would respond as it did in 2009, when the government increased unemployment benefits and infrastructure spending during the recession.
On Tuesday all staff at the U.S. embassy in Ottawa were at work and offering regular services. That was also the case for the entire U.S. State Department. Though the term “shutdown” is frequently used, the situation is more accurately described as a lapse in funding. Departments can operate on reserves for a period of time, but the situation could change by the day.
Mr. Robertson estimated that State Department services such as visa processing would likely be affected if the shutdown lasted for a couple of weeks.
A September report by the Congressional Research Service looked at how services were affected during shutdowns in late 1995 and early 1996 that lasted a combined 28 days. The report says that those shutdowns may not be directly comparable to this year’s situation, but they may offer a guide.
The report noted that during those shutdowns, approximately 20,000 to 30,000 applications by foreigners for visas reportedly went unprocessed each day.
There were no indications of major border delays Tuesday.