OTTAWA – Following a warning from the IMF, finance ministers from G20 countries will meet in Washington this week in the hopes their unified front may have some sway in bringing U.S. lawmakers to their senses and avoid a credit default later this month.
In Canada, an official with the Finance Department told reporters Tuesday the potential crisis from even a technical default, along with the continuing U.S. government shutdown, will dominate International Monetary Fund and World Bank meetings that run Wednesday to Sunday.
Speaking on condition of anonymity, the official would not prejudge whether a statement urging quick resolution will be part of the official communique from the ministers, including Canada’s Jim Flaherty.
But the G20 could play a role through peer pressure, the official said.
Earlier, the IMF downgraded the outlook for the world economy, and warned of further “serious damage” if Congress fails to avert a partial default by refusing the raise America’s debt ceiling.
In a statement, Canadian Finance Minister Jim Flaherty said political gridlock in Washington was “not good” for either the global or Canada economies, although he expressed confidence politicians would reach an agreement.
The question of whether the agreement will come in time — some analysts say a default could happen anytime between Oct. 17 and the end of the month — remains open, however, as both sides stake out seemingly irreconcilable positions.
At a news conference Tuesday afternoon, President Barack Obama said he could not cave to extortion and warned that a default would be as “catastrophic” as it was unprecedented. He pointed out that the mere threat of a default in the summer of 2011 led to a sharp market correction and a downgrade in the U.S. credit rating.
But Republicans were downplaying the possible repercussions.
Most analysts believe the consequences of even a technical default – where the U.S. pays off bond holders but delays payments on domestic suppliers – will shake confidence, especially if the crisis is not resolved quickly, and could lead to massive disruptions in global markets.
The Canadian official said the flow-through to Canada would come via several channels, including lower demand for Canadian exports as the global economy takes a hit and volatility in exchange markets.
Market jitters were evident throughout Tuesday, with both the Toronto and New York exchanges trading well below Monday’s close and the Canadian dollar suffering further losses, down half a cent to 96.47 in late afternoon trading
But the more fundamental issue is that the last thing the world’s economy needed, at a time when the global economy, and Canada’s, has yet to fully recover almost five years after the recession, was new, self-inflicted wounds.