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The Doomsday scenario of a U.S. default Add to ...

These are stories Report on Business is following Thursday, Oct. 3, 2013.

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Debt fears mount
Call it the Doomsday scenario.

On the third day of the Washington shutdown, fears mounted on all fronts of what may lie ahead amid the political stalemate that has crippled the U.S. government.

The U.S. Treasury Department warned today that a default could be “catastrophic,” The Financial Times reported that two major American banks are putting extra money into ATMs, and market analysts warned of trouble on major exchanges already hit by concerns.

With no resolution in sight, Oct. 17 looms large for the issue of raising the debt ceiling. That’s when Treasury officials say the government will be tapped out.

“If Congress doesn’t reach an agreement to raise the debt ceiling before the U.S. Treasury runs out of ways to keep the ‘essential’ parts of the government running – sometime around the middle of the month – then the U.S. may not have enough cash to meet (among other requirements) a debt interest payment of about $30-billion on 15 November, potentially triggering a technical default,” warned Jessica Hinds of Capital Economics.

While a default seems unthinkable, the Treasury Department went so far today as to release a six-page report warning of the consequences.

Indeed, the department said, “political brinksmanship” that results in the prospect of a default can mean big trouble.

“A default would be unprecedented and has the potential to be catastrophic: Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse,” the department said.

The report concludes by elaborating on “or worse” by noting that “the result then was a recession more severe than any seen since the Great Depression.”

According to reports in the United States, Speaker John Boehner told Republicans he would not allow things to go that far.

The Treasury department also recalled the events of the last fight over the debt ceiling, in 2011, when markets were stressed, job creation faltered, and S&P stripped the U.S. of its triple-A rating.

“To be sure, other forces also played a role, but the uncertainty surrounding whether or not the U.S. government would pay its bills took a toll on the economy,” the report said.

Here’s what happened then:

  • “From June to August 2011, consumer confidence fell 22 per cent and business confidence fell 3 per cent. Measures of both had already begun to fall earlier in 2011, in part because of developments abroad, but as the debate about the debt limit grew, these measures of confidence fell further.”
  • “Stock prices, stock price volatility, credit risk spreads and mortgage spreads all deteriorated in August 2011 and recovered only after many months.”
  • “The S&P 500 index of equity prices fell about 17 per cent in the period surrounding the 2011 debt limit debate and did not recover to its average over the first half of the year until into 2012 … Between the second and third quarter of 2011, household wealth fell $2.4-trillion.”
  • “In the late summer of 2011, the 30-year conventional fixed-rate mortgage spread jumped by as much as 70 basis points and the wider spreads lasted into 2012. For an average mortgage of $235,500 at that time, 70 basis points more on a mortgage rate would increase monthly payments by about $100 per month.”

International Monetary Fund chief Christine Lagarde backed this up today, calling a resolution “mission critical.”

The Financial Times, meanwhile, quoted one executive as saying his bank was readying up to 30 per cent more money for bank machines should customers panic.

Spies are laid off so 'sext' away
Some slices of life from across an America in shutdown mode, courtesy of The Associated Press, The Washington Post, Forbes and CNN, via The Dollar Vigilante:

1. Follow the trials and tribulations of Mike Cassesso and MaiLien Li at #shutdownwedding. Their marriage-to-be on the lawn by the Jefferson Memorial in Washington is threatened, as are others, such as a couple from New Jersey who want to get married at the Grand Canyon. Small mercy: Wedding night at the Hilton is probably more comfortable anyway.

2. Expect delays if you’re trying to adopt a small donkey, which you can, normally, actually do. Small mercy: The asses can’t leave Washington.

3. Public toilets are closed along the 184-mile C&O Canal route and national park, a popular bike route. Small mercy: There doesn’t appear to be a lot of poison ivy along the way.

4. The Armed Forces Retirement Homes in Washington and Gulfport, Miss., home to many of the 80-plus crowd, had to scrap Saloon Night. Small mercy: You can still rent the DVD of Animal House.

5. Given that the Bureau of Alcohol, Tobacco and Firearms is affected, there could be trouble with gun permits. Small mercy: The NRA will have its knickers in a knot.

6. There’s a farmer in Wisconsin unable to cash a cheque for a cow he just sold because he needs someone at the Farm Service Agency to sign off on the sale. Small mercy: BBQ’d steak, anyone?

7. Home buyers may have to wait because some mortgage providers need certain information on taxes and social security before they can approve a loan. Small mercy: No one really wants another housing bubble.

8. The Ku Klux Klan can’t hold a scheduled event at Pennsylvania’s Gettysburg National Military Park. Small mercy: Do you really have to ask?

9. If you were troubled by the National Security Agency’s Prism program, whereby spooks scour the e-mails, online chats and social networking of folks using everything from Facebook to Skype, here’s your chance. Some NSA staffers aren’t deemed essential and are being laid off. Small mercy: Alison Pill can send selfies to her beau again, secure in the knowledge that some snoops are furloughed and will have to get their jollies elsewhere. But first she has to make sure she knows how to use her BlackBerry so she doesn’t send them to thousands of her Twitter fans.

Twitter files IPO document
Twitter Inc. filed today for an initial public offering that sees raising up to $1-billion (U.S.).

The micro blogging service, which will trade under the symbol TWTR, also took the wraps off its financials and number of users, disclosing the information in the document filed with the Securities and Exchange Commission.

Highlights from the filing include:

  • Twitter’s revenue climbed in the six-month period ending June 30 to $253.6-million from $122.4-million a year earlier.
  • Its net loss for the same period swelled to $69.3-million from $49.1-million.
  • The number of monthly active users has climbed steadily, to 215 million from the 135 million range at the end of March last year.

 

BlackBerry draws more interest
Fairfax Financial Holdings Ltd. has submitted a draft of its takeover agreement to BlackBerry Ltd., The GLobe and Mail's Tara Perkins, Sean Silcoff and Jacquie McNish report today.

But the Canadian firm might have competition in its bid to take private the ailing company, whose stock price sank today by almost 3 per cent.

According to sources, New York-based private equity firm Cerberus Capital Management LP is seeking to sign a non-disclosure agreement so that it may review confidential BlackBerry information that is only available to prospective buyers. But Cerberus is not a part of Fairfax’s consortium, sources said, implying that a rival bid is a possibility.

Home sales climb
September’s home sales are coming in strong, with Toronto, Calgary and Vancouver all reporting solid year-over-year increases, The Globe and Mail's Tara Perkins reports.

While the number of existing homes that have sold in the Greater Toronto Area so far this year remains about 1 per cent lower than during the same period in 2012, the slump has certainly abated with September’s 7,411 sales coming in 30 per cent above those in September 2012.

The MLS Home Price Index for the city was up 4 per cent year-over year, and the Toronto Real Estate Board said the annual rate of growth in prices has been accelerating since the spring.

How long for the Bank of Canada?
Bank of Nova Scotia economists are now raising the possibility of no move in the Bank of Canada’s benchmark interest rate until 2016.

Other observers have speculated on late next year or early in 2015 for the first rate hike by the central bank.

But Scotiabank’s Derek Holt, Mary Webb and Dov Zigler say the Bank of Canada is now signalling a hold of more than two years, citing signs in a recent speech by senior deputy governor Tiff Macklem, among other things.

Earlier this week, Mr. Macklem painted a less optimistic picture than that painted a couple of weeks earlier by Governor Stephen Poloz.

The Bank of Canada’s benchmark overnight rate now stands at just 1 per cent.

“The BoC probably now envisages spare capacity remaining into 2016,” the Scotiabank economists said, adding the central bank now projects hitting its 2-per-cent target for annual inflation in mid-2015.

They believe the Bank of Canada may change that forecast, to an even later date, when meets later this month and also issues its monetary policy report.

“Against the conventional thinking that the BoC would want to hike before spare capacity closes, we continue to think that very easy money will be required even as spare capacity shuts,” the economists said.

“That’s because we don’t see the economy slipping into material excess aggregate demand into 2016,” they added in a research note.

“Highly stimulative monetary policy may therefore be required even at a resting equilibrium of no spare capacity. An added constraint in this regard is that while the BoC has exercised modest policy independence from the Federal Reserve in the past and with a mixed track record, we continue to view the central bank as being toward the limits of independence from Fed policy.”

The Fed has vowed to hold its benchmark rate at effectively zero until unemployment eases to at least 6.5 per cent.

The Scotiabank economists have been further out than others in the belief that the Bank of Canada won’t move until the third quarter of 2015, with the possibility of holding steady until “well into 2016.”

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