These are stories Report on Business is following Thursday, Oct. 10, 2013.
Stocks surged today amid hopes for peace in Washington's fiscal war.
On Day 10 of the U.S. government's partial shutdown, signs of an end to the stalemate emerged with a proposal from the Republicans, The Globe and Mail's Kevin Carmichael reports from Washington.
The Republicans offered to boost the debt ceiling for several weeks if there are formal talks aimed at cutting the budget deficit. It was the first time the Republicans have blinked.
No deal was reached during a meeting between the Republicans and President Barack Obama at the White House, but the two sides continue to bargain.
Amid the shutdown, fears have mounted that U.S. politicians may not agree to raise the debt limit before Oct. 17, after which the Treasury Department says the government will be tapped out.
That fear turned to optimism early today, however, rippling through global markets.
The S&P 500 and Dow Jones industrial average surged 2.2 per cent, the latter up by more than 320 points. Toronto's S&P/TSX composite gained 1.3 per cent, or about 164 points.
Still, analysts warn that the showdown will return to haunt markets if a final deal in fact involves a short-term boost to the debt limit.
“All this essentially means is that negotiations will be delayed by a couple of months, at best, and we’ll be back in the same situation again come Christmas," said market analyst Craig Erlam of Alpari in London.
“Unfortunately, though, under the circumstances that is a positive thing, not just for the financial markets but the global economy, which would suffer hugely if the U.S. was forced to default on its debt.”
Mr. Erlam is not alone.
Matt Basi of CMC Markets in London said any move in the deadlock was certain to spark a relief rally in the markets, but reports of what the Republicans may propose suggest it may not be palatable for the Democrats and the president.
“The other thing to note is that anything passed looks to at best stall, only to endure it all again in the near future,” Mr. Basi said.
“So yet again it appears the job of the U.S. politician is simply to apply a strong foot to that poor old can on a never-ending road, rather than to find a cure. So for the markets … relief yes, solution no."
- Kevin Carmichael: Republicans offer up short-term plan to avert U.S. default
- Follow our Inside the Market blog
- Kevin Carmichael: U.S. budget showdown drives up borrowing costs
- Things you can't do amid U.S. shutdown (But spies laid off so 'sext' away)
Just about any way you slice it, the Washington stalemate is going to take a toll on Canada. The question is just how big a toll.
Chief economist Avery Shenfeld of CIBC World Markets runs through the scenarios today, and the potential impact on the Canadian economy, from the mild to the severe.
Here’s what he finds:
Scenario 1 (highly probable):
The partial government shutdown runs no more than three weeks, with a spending plan and a lift to the debt ceiling “that pushes that issue off for at least several months.”
By studying the impact during the Clinton Administration, the shutdown would shave about 0.5 per cent from annualized economic growth in the U.S. in the fourth quarter, putting it at 2.3 per cent.
That scenario “shaves perhaps one tick off Canada’s Q4 growth rate," bringing it to 2.1 per cent from what otherwise would have been 2.2 per cent.
Scenario 2 (next in likelihood):
The two sides strike a temporary agreement for spending and the debt limit – along the lines of today's Republican proposal – but the result is more restraint than what’s under discussion now.
That would mean the same hit in the final quarter of this year, but also filter through to take a toll on the economy in 2014.
“Interest-sensitive domestic spending in Canada might actually grow a bit faster or at least no worse than in the base case, but exports and related capital spending could remain quite lacklustre.”
Scenario 3 (ugly and least likely):
This would involve a “significant breach” of the Treasury Department’s Oct. 17 drop-dead date for raising the debt ceiling.
“While that could be tolerated for a week or two (i.e. to October end), November would force Washington to either suspend some debt payments, or miss other economically significant payments (social security, Medicare, military pay, etc.), as overall spending would have to be trimmed by roughly 4 per cent of GDP on an annual basis. That’s enough to risk at least a short-term recession in the U.S.”
And that’s where it gets particularly ugly for Canada:
“If interest payments are missed, Treasury yields could spike, and the repo market could freeze up, representing a hit to financial sector liquidity. Given the scale of that shock, it could put Canada into recession or close to one. Canadian yields could actually drop as a result of both the economic slowdown and safe-haven flows into our fixed income market. Exporters would take the largest hit (both through volumes and weakness in commodity prices). Safe-haven flows might also lift the [Canadian dollar], further hitting exporters.”
It’s what that would mean that makes such a scenario unlikely, Mr. Shenfeld says.
Already, The Globe and Mail's Bertrand Marotte reports, Bombardier has been hit by the shutdown because it can't get two of its new planes delivered to U.S. customers.
- Kevin Carmichael: Republicans offer up short-term plan to avert U.S. default
- Bertrand Marotte: U.S. shutdown halts Bombardier aircraft deliveries
- Failure to raise U.S. debt limit would spark global recession: OECD
Co-founders mull run at BlackBerry
The co-founders of what is now BlackBerry Ltd. are eyeing a bid for the embattled smartphone manufacturer.
The potential offer by Mike Lazaridis and Douglas Fregin, who together control some 8 per cent of BlackBerry, was disclosed in a document filed with the Securities and Exchange Commission.
Investment companies owned by the two have struck an agreement to “work exclusively with each other with respect to any potential acquisition of all or a portion of the assets or equity interests” of BlackBerry, according to the document.
They have hired Wall Street giant Goldman Sachs & Co. and Centerview Partners LLC to help in the process.
“In light of [BlackBerry’s] recent announcement that its board of directors has formed a special committee to explore strategic alternatives to enhance value and increase scale, the reporting persons are considering all available options with respect to their holdings of the shares, including, without limitation, a potential acquisition of all the outstanding shares of the issuer that they do not currently own, either by themselves or with other interested investors,” the document says.
Mr. Lazaridis, former co-CEO and founder of what was then Research In Motion, and Mr. Fregin, also a founder and former vice-president of operations, together control 41.7 million shares.
BlackBerry is up for auction and has signed a tentative deal that would see Fairfax Financial Holdings Ltd. lead a consortium to acquire the company for $4.7-billion (U.S.) or $9 a share.
BlackBerry shares have been trading well below that mark, and remain there today, however, as markets question whether the Fairfax deal will get done, despite repeated assurances from Fairfax, which already holds almost 10 per cent of the company.
Other potential suitors, such as U.S. private equity firm Cerberus, have also considered bidding. Industry players such as Google Inc., Cisco Systems Inc. and SAP AG are also reportedly eyeing BlackBerry and its assets.
BlackBerry recently posted a quarterly loss of almost $1-billion, and is slashing some 40 per cent of its work force while retreating from the consumer market amid fierce competition with Apple Inc. and its iPhone, Samsung and its Galaxy, and smartphones operating with Google's wildly popular Android system.
(Editor's note: An earlier online version of this story incorrectly stated that Mike Lazaridis and Douglas Fregin together control some 16 per cent of BlackBerry. This online version has been corrected.)
- Complete coverage of BlackBerry
- Boyd Erman in Streetwise (for subscribers) Lazaridis, Fairfax and BlackBerry: quick thoughts on an unlikely team
- BlackBerry office in Halifax to shut down
- BlackBerry in sale talks with Cisco, Google, SAP: sources
- Tara Perkins, Sean Silcoff and Jacquie McNish: Fairfax submits draft BlackBerry offer as spectre of rival bid looms
- Boyd Erman and Grant Robertson: BlackBerry buyout could get boost with $500-million tax refund
- Sean Silcoff, Jacquie McNish and Steve Ladurantaye: An exclusive report on the fall of BlackBerry
- How BlackBerry lost World War Z
Flaherty urges end to QE
Canada's finance minister says the Federal Reserve should wind up its extraordinary bond-buying program with haste, warning the effort risks the long-term stability of the world's most import economy, The Globe and Mail's Kevin Carmichael reports.
"I don't think they should have done it in the first place," Jim Flaherty told reporters in Washington today when asked to share his thoughts on the Fed's controversial policy, known as quantitative easing, or QE. "Now that they have, they should get out of it as quickly as they can."
The comments are Mr. Flaherty's most expansive on a subject that has divided market participants and policy makers around the world.
911 needs emergency fix
Canada’s 911 system is plagued with numerous problems, including technology gaps, lack of oversight and inadequate funding, and is in dire need of an overhaul or risks falling apart as telecoms upgrade to new communications systems, a new report released today warns.
The blunt assessment from a former regulator will form the basis of a sweeping consultation on the future of 911 services by the Canadian Radio-television and Telecommunications Commission, The Globe and Mail's Rita Trichur reports.
Streetwise (for subscribers)
ROB Insight (for subscribers)