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Federal Finance Minister Jim Flaherty (CHRISTINNE MUSCHI/REUTERS)
Federal Finance Minister Jim Flaherty (CHRISTINNE MUSCHI/REUTERS)

U.S. debt situation 'very worrisome': Flaherty Add to ...

Finance Minister Jim Flaherty says he is "relatively confident" that the United States will reach a debt ceiling solution in the next few days.

Mr. Flaherty called the U.S. debt situation "very worrisome" but he remained tight-lipped about any contingency plans for Canada in the case of a U.S. default. He was in the picturesque city to host a roundtable with a number of small-business leaders to gauge their views on the economy.

"We are very concerned," Mr. Flaherty said, speaking to reporters at the Palletta Park Mansion in Burlington, Ont.

"This is an issue that has consequences for not only the United States but the global economy because of the reliance of the global economy on U.S. Treasuries."

Still, he acknowledged that global risks have intensified. In particular, he fingered the "uncertain pace" of the U.S. economic recovery as a matter of concern, especially against the backdrop of a "volatile" global situation which includes lingering worries over the European debt crisis.

While the Group of Seven nations has not held a recent consultation on the U.S. debt situation, it has held a number of calls on the issue in the past that also touched on the ongoing situation in Europe.

"I have quite frequent telephone conversations with the U.S. Secretary of Treasury Tim Geithner."

While he did not elaborate further, he stressed the Americans are "fully cognizant of the consequences of failing to arrive at some sort of an agreement."

There is just one week left before the Aug. 2 deadline to raise the $14.3-trillion ( U.S.) debt ceiling, leaving the world to watch with bated breath as the political gridlock continues in Washington.  

Mr. Flaherty signalled, however, that he is also looking beyond next week's deadline, noting that much heavy lifting remains as the longer-term issues of debt and deficits must also be resolved.

It matters to Canada, he said, that its largest trading partner get its fiscal house in order.

In addition to the U.S. debt situation, there are also lingering concerns with respect to sovereign indebtedness of certain European countries that require long-term planning "in order to maintain market confidence," he said.

Still, Mr. Flaherty remained mum on Canada's contingency plan if the U.S. does end up in default. Nor did he say whether he has been in contact with the Bank of Canada on the issue.

"What we are doing in Canada is what we are able to do in Canada. As we did before the recession, we maintained balanced budgets and paid down large amounts of public debt," he said, adding Canada is on track to return to a balanced budget by 2014.

If U.S. lawmakers fail to reach a deal to raise the debt ceiling in time, the U.S. risks defaulting on its debts along with a humiliating downgrade of its stellar triple-A credit rating.

Standard & Poor's warned on July 14 that Washington's inability to reach and implement a "medium-term fiscal consolidation policy" in a timely manner would be "inconsistent" with its current credit rating.

A credit downgrade would likely cause a spike in interest rates and create fresh malaise for an already struggling U.S. economy -- the impact of which would be felt around the world.

Mr. Flaherty acknowledged that "disorder" in credit markets could result in less available credit and higher interest rates.

Canadians, he added, are also recognizing they must control their own personal debt loads, including residential mortgages.

"This is a good thing. This is something that I have been encouraging Canadians to do," he said.

He also reiterated his warning that mortgage rates will rise over time and that Canadians should be prepared to pay those higher rates.

On Monday, when asked whether he has a plan in place to cushion Canada from the impact of a U.S. default or credit downgrade, Mr. Flaherty sidestepped the question but strongly suggested that the Finance Department is worried.

``As the largest economy in the world and Canada's largest trading partner, we are closely following the current political impasse in the U.S. regarding debt and deficit concerns,'' Mr. Flaherty said at the time in an e-mailed statement. ``Clearly, we believe the situation needs to be addressed in the very near future to ensure continued confidence in the American and global economy.''

Last week, Bank of Canada Governor Mark Carney told reporters in Ottawa that he believes ``U.S. authorities will come to an arrangement that honours their obligations to debt holders.'' A default would have ``profound implications'' for the global financial system, he said, but ``it's not our expectation that it will happen.''

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