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Canadians ignore the U.S. debt-ceiling standoff at their own peril

Commentators have cried wolf about debt ceilings and fiscal cliffs so often that Canadians can be forgiven for ignoring the latest confrontation brewing between President Barack Obama and Congress. But that would be a mistake.

A perfect storm (to mix metaphors) of three separate fiscal and legislative crises is converging on Washington. Unless the administration and Congressional leaders can find a way to disperse that storm, the United States government could default on its debt, be forced to cut a trillion dollars from spending or simply shut down.

The price of staving off any one of these disasters may be allowing one of the others to happen. And that would be very bad news for the Canadian economy.

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Over the past few years, the Americans have punted a series of debt and spending deadlines time and time again. Now all the deadlines are arriving at once.

On March 1, "sequestration" kicks in, the first tranche of $1.2-trillion (U.S.) over nine years in mandatory spending cuts – half of them to Defence – unless Congress and the administration can find another way to rein in the U.S. government's trillion-dollar annual deficits.

Economists warn that the severity of the cuts could harm the American economic recovery. That which harms the American economy also harms Canada's.

At about the same time, the federal government is expected to hit the latest "debt ceiling," and will default on its obligations unless Congress raises the ceiling again.

A default would be many times worse than sequestration for global economic growth. But the President is refusing to get into yet another round of protracted negotiations with House Republicans over raising the limit. The last such battle, back in the summer of 2011, paralyzed Washington for months and produced the sequestration nightmare.

"While I'm willing to compromise and find common ground over how to reduce our deficit, America cannot afford another debate with this Congress over how to pay the bills they've already racked up," Mr. Obama said Monday at a press conference.

"To even entertain the idea of this happening, of America not paying its bills, is irresponsible. It's absurd."

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And there's a third problem. The U.S. government will also run out of money to pay for its day-to-day operations March 27, without a fresh continuing resolution from Congress that would allow it to carry on. The government would be forced to shut down all non-essential services and send its workers home.

A grand bargain is obviously needed to lift the debt ceiling and rein in spending responsibly without shutting down the government or risking a recession.

But House Republicans are beyond angry at losing the battle over the "fiscal cliff" crisis last month, which resulted in the wealthiest Americans seeing their taxes go up.

Politico, the inside-the-Beltway publication that often has the best read on Washington politics, is warning that House Speaker John Boehner almost certainly won't be able to corral the necessary Republican votes to prevent at least one of the three fiscal disasters.

If so, to prevent default or shutdown, sequestration will probably be allowed to go ahead.

"GOP officials said 90 per cent of their members are prepared to allow the [sequestration] cuts to take effect, rather than compromise, based on their preliminary head counts," the website reported on the weekend. "This seems like the most likely outcome right now.

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"Sequestration, while devastating to defense contractors like Lockheed Martin, is small potatoes compared to the debt limit."

Note that reference to Lockheed Martin, the aircraft manufacturer behind the new F-35 stealth fighter. The Harper government, bruised by pie-in-the-sky initial cost estimates, has launched a review of its decision to acquire the aircraft.

But that review could be largely academic. If sequestration kicks in, the cuts to Defence will wreak havoc with procurement. No one will be able to say how much the plane will ultimately cost or when it will become available.

So the Canadian economy and the federal government are once again being held hostage in the war between Congress and the administration.

And yes, we're crying wolf again. But this time there are three wolves, and that makes for a pack of trouble.

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