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Business Briefing

Warring U.S. factions hold 'fate of the world economy in their hands' Add to ...

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

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Markets twitch
The world is growing increasingly anxious over the debt stalemate in Washington, fearing the extreme scenario of a U.S. default.

Markets cringed today and countries such as China and Japan warned warring U.S. politicians to tread cautiously as the partial government shutdown enters its second week and the supposed drop-dead date of Oct. 17 to raise the debt limit draws closer.

Stocks tumbled, though, as Bank of Nova Scotia economists put it, have yet to price in a “U.S. fiscal policy-induced doomsday.

The S&P 500 and the Dow Jones industrial average both slipped by 0.9 per cent, though Toronto’s S&P/TSX composite edged up.

“It almost feels like the Republicans are spoiling for a fight, as politicians play Russian roulette with the markets, and this appears to be finally filtering through into overall investor sentiment,” said senior market analyst Michael Hewson of CMC Markets in London.

 “I wonder if any of these Democrat and Republican politicians currently bickering amongst themselves, with the fate of the world economy in their hands, can see the irony in how the worm has turned, and how their behaviour damages the credibility of the U.S. in the eyes of the rest of the world,” Mr. Hewson added in a report on the market’s reaction.

Markets fear the deadlock won’t be resolved in time to raise the U.S. debt ceiling before what the Treasury Department says is an Oct. 17 deadline.

That’s when the government will be tapped out, according to officials, though some observers believe the Administration has more leeway that that, and options to pursue.

The fear in the market, however, is real, and rising by the day.

“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,” said chief economist David Rosenberg of Gluskin Sheff + Associates, adding that that investors no longer see a technical default as “a zero-per-cent prospect.”

China’s vice-minister of finance, Zhu Guangyao, 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. In Tokyo, according to The Financial Times, a senior official also cited the worry of the finance ministry over how the Washington crisis could hit currency markets.

Japan fears a rising yen should the U.S. dollar sink on a default.

“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?”

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.

Icahn grabs Talisman stake
Carl Icahn appears headed for battle with Canada’s Talisman Energy Inc., The Globe and Mail's Jeffrey Jones reports.

The renowned financier and activist said via Twitter today that he holds 61 million shares, or 5.97 per cent, of the Calgary-based energy company and “may have conversations” with management over “strategic alternatives” and seats on the board.

Teachers calls for women on board
The Ontario Teachers’ Pension Plan is urging the province’s securities regulator to require all public companies have at least three women on their boards, or else risk being delisted from the Toronto Stock Exchange, The Globe and Mail's Janet McFarland reports.

Teachers outlines the proposal in a letter submitted to the Ontario Securities Commission in response to its call for comments on a possible new “comply or explain” disclosure rule to boost the number of women on boards. The OSC proposal would require companies to report annually on their efforts to improve board diversity or else explain why they have opted not to make the disclosure.

Quebec unveils jobs plan
Faced with Quebec’s disappointing economic growth, the Parti Québécois government plans to invest close to $2-billion in public funds in a bid to create 43,000 jobs by 2017, The Globe and Mail's Sophie Cousineau reports.

To spur $7.6-billion in public and private investments over the next four years, the government will use its electricity surpluses, accelerate the renovation of schools and invest in its northern infrastructure.

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, by 3.6 per cent to $7.97, 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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