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A man looks at a stock quotation board outside a Tokyo brokerage Monday, Oct. 7, 2013 (Toru Hanai/Reuters)
A man looks at a stock quotation board outside a Tokyo brokerage Monday, Oct. 7, 2013 (Toru Hanai/Reuters)

Morning Business Briefing

Markets shudder as U.S. brawl sparks fears of shock ‘worse than Lehman’ Add to ...

These are stories Report on Business is following Monday, Oct. 7, 2013.

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Markets sink
The Washington standoff is taking its toll on global markets today, as the weekend passed with no resolution to the partial government shutdown and as a mid-October debt ceiling deadline draws closer.

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“Rather predictably, another weekend passing with no progress in the ‘United’ states has led to markets twitching yet again on a Monday, with European benchmarks sliding as politicians continue to paint a picture of inevitability about a U.S default,” said senior sales trader Nick Dale Lace of CMC Markets in London.

“Whatever your views, there does seem to be some consistency in commentary, this will weigh on confidence and it will hamper growth.”

The pessimism began in Asia, spreading to European markets and then to North American exchanges as the S&P 500 and Dow Jones industrial average sank, though pulled back somewhat. Toronto's S&P/TSX composite rose by midmorning.

The Republicans and Democrats continued to bicker over the weekend – Treasury Secretary Jack Lew warned the U.S. Congress is “playing with fire” – suggesting no end in sight to the shutdown stalemate now in its seventh day.

This has heightened fears that the U.S. debt ceiling of almost $17-trillion (U.S.) won’t be raised by Oct. 17, the day the Treasury Department says it will be tapped out. That has sparked concern over the possibility of another debt downgrade and, in the extreme, a default, which the Treasury Department warned last week would result in a shock more severe than the financial crisis.

“An ugly way to kick off the week with global equities down sharply – roughly 1 per cent or so as concerns mount over the ongoing impasse in Washington (markets no longer treating a technical default as a 0 per cent prospect,” said chief economist David Rosenberg of Gluskin Sheff + Associates.

“The partial government shutdown heads into its second week and investors are linking this confrontation to the potential for the debt ceiling to be breached.”

Some analysts say the U.S. government, however, actually has more leeway than the Oct. 17 deadline suggests.

But given the warnings about the financial turmoil that would trigger, other governments are pleading with the United States to settle the issue.

China’s vice-minister of finance, Zhu Guangyao, for example, urged the U.S. to remember the events of 2011, when markets shuddered amid the downgrade by Standard & Poor’s, which stripped the government of its triple-A rating.

“We hope the United States fully understands the lessons of history,” he told reporters in Beijing, according to Reuters.

Market analysts also warned of the potential fallout.

“While default seemed unthinkable only a few weeks ago, it appears to the outsider that something drastic will need to happen to avoid a scenario dubbed ‘worse than Lehman’s,” said market analyst Alastair McCaig of IG in London, referring to the collapse of the U.S. bank that triggered the financial crisis.

“Drawing on historical comparisons, a fracturing within one of the parties seems the most plausible catalyst, so who might blink first and decide they are not comfortable with being accountable for such grave economic consequences?”

While stocks have been roiled today, U.S. Treasurys appear to be the winner from the stalemate, which CMC’s Mr. Dale-Lace sees as ironic given that they are the “very bonds that are apparently at risk of default.”

That, however, promises to change in the run-up to Oct. 17.

“As yet the U.S. debt markets have remained calm but the closer we get to the mid-October deadline the less likely that is to remain the case,” said Mr. McCaig.

Obama’s options
Bank of Nova Scotia’s Derek Holt and Dov Zigler today examine President Barack Obama’s emergency powers, which have “far-reaching ramifications.” And it’s not entirely clear what he could use where the debt ceiling’s concerned.

“The U.S. is also courting another downgrade on what amounts to a political process that is in a state of disrepair,” the Scotiabank economists said.

“At issue is the legitimate concern over the previously unquestioned assumption that the U.S. government will honour its debt payments at all costs and this strikes to the very heart of the world’s financial system in ways that make the 2008 crisis pale by comparison should things really skid off the rails,” they added in a report.

“Our base case scenario remains that a debt ceiling agreement will materialize and default will be averted, but it’s clear that the shutdown will linger for a while yet and perhaps to the eve of when the ceiling becomes binding.”

Here are some of the president’s options, as they see it.

1. He could “unilaterally act” under the 14 Amendment, which says that “the validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

That’s a weird thing that dates back to 1868, and one which the White House has already rejected trying to interpret and use.

But, said Mr. Holt and Mr. Zigler, “one way in which this could be utilized would be to issue bonds into social security funds and other social safety net programs as they count outside of the public debt to which the debt ceiling applies.”

2. “The president can choose least damaging violation of the Constitution. An article that was authored by two law professors and published in October 2012 in The Columbia Law Review … argued that since by failing to raise the debt ceiling Congress is essentially saying the government cannot issue debt but must spend and cannot raise additional tax revenues through further means, and therefore the president ‘has to decide which of Congress’s orders to follow” and must “choose the least unconstitutional option.’”

3. The government could issue ‘premium’ bonds: “The thinking here is that because the debt ceiling applies to the face value of bonds issued and not the total funds raised, that new bonds can be sold at a premium interest rate and thus raise greater funding than the par value of the bonds. Such issues could be used to roll over other previously existing debt without violating the debt ceiling while simultaneously raising more funds.”

4. Issue a platinum coin worth a lot of money, an idea that has been tossed around a lot, but few see happening: “Because of a loophole, the U.S. Treasury has the option of issuing platinum coins with no limit. Jack Balkin, a professor of constitutional law at Yale was the first to suggest this option. It would amount to exploiting a loophole that was designed to allow the issuance of commemorative coins and turn it into a funding instrument.”

5. Hit up the Federal Reserve: “The Federal Reserve is not a direct option for funding the U.S. government because the Federal Reserve Act prohibits buying bonds at issue as opposed to the secondary market. Some speculate, however, that in desperate times the U.S. government could write an option to the Federal Reserve to purchase government property for a specified amount and the Fed would then credit the government’s account.”

All of these measures, however, would “risk legal challenges, risk impeachment proceedings and a full-blown political crisis,” the economists added.

BlackBerry on rise
Shares of BlackBerry Ltd. are climbing today in the wake of weekend reports indicating some heavyweight players are in talks with the smartphone company about a takeover.

BlackBerry is on the auction block, and has a tentative $4.7-billion (U.S.) bid from Fairfax Financial Holdings Ltd., which proposes leading a consortium to take the embattled Canadian company private.

While the stock is up today, it’s still well below the proposed Fairfax offer of $9 a share amid doubts that deal will go through, despite repeated assurances that it will.

This follows a weekend report from Reuters saying BlackBerry is negotiating with Cisco Systems Inc., Google Inc. and SAP AG.

The Globe and Mail has reported that U.S. private equity firm Cerberus is also interested.

Loblaw, UFCW reach tentative deal
Loblaw Cos. Ltd. has struck a tentative deal with the United Food and Commercial Workers union that would end a short-lived strike in Alberta.

Loblaw had been keeping its Real Canadian Superstore and Real Canadian Liquorstore outlets open since the walkout began on the weekend.

The union, which represents about 8,500 workers in the province, will vote on the tentative pact tomorrow.

The Canadian grocer has already reached deals with the union in Manitoba and Saskatchewan.

Building permits slip
The value of Canadian building permits slumped 21.2 per cent in August, basically retracing a July surge.

Building permits are notoriously volatile and, Statistics Canada said today, the trend has been “relatively flat” since the start of the year.

The drop in August from July was on lower permits in both the residential and non-residential sectors, the federal agency said.

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