Flaherty confident about U.S. debt

Failure to resolve standoff would cause crisis: IMF

Finance Minister Jim Flaherty says he is “confident” the United States will resolve its political standoff over government spending and debt ceiling.

That’s because anything less than a quick resolution in the U.S. — the No. 1 economy — could be unthinkable, slamming the brakes on growth in other countries, as well. At the very least, it could force a major recasting of world forecasts in the near term.

“Obviously, political gridlock in the U.S. is not good for the global economy or Canada,” Flaherty said Tuesday. “I am confident that U.S. leaders will reach an agreement and start really addressing high U.S. government debt levels.”

Flaherty’s comments came on the same day as the International Monetary Fund announced a recasting of its growth predictions — lowering its global outlook, as well as reducing growth forecasts for the U.S. and Canada.

“The effects of any failure to repay the debt would be felt right away, leading to potentially major disruptions in financial markets, both in the United States and abroad,” said Olivier Blanchard, IMF chief economist. “We see this as a tail risk, a low-probability risk, but were it to happen it would have major consequences.”

The deadline for U.S. legislators to reach a debt-ceiling compromise is Oct. 17. But Democrats and Republicans still haven’t agreed on overall spending levels, which resulted in a shutdown of nonessential government services on Oct. 1. “There are more and more scenarios floating around that they could raise the debt ceiling for a week,” said Charles St-Arnaud, of Nomura Securities.

“That’s when it starts to be a problem. That’s when uncertainty starts to sink in. Consumers stop consuming, business stop investing,” he said.