What does the US credit downgrade mean for Canada?

With the news that stock markets are crashing today on the back of Standard & Poor's decision to downgrade the U.S. credit rating, we should be mindful of the implications for Canada.

In today's Vancouver Sun, Don Cayo has written this interesting article which I have paraphrased ...

If the Standard & Poor's downgrade from AAA to AA+ is a wake-up call, and this is precisely how it should be seen, the G7 and G20 leaders give every indication that they're paying attention.

The downgrade is a made-in-America mess and that's where the solution will be found - if it's to be found at all.

There are genuine questions of whether the downgrade means much in substantive terms.

It was, after all, just one rating company, Standard & Poor's. Others - Moody's, for example, or Fitch Inc. - have reaffirmed their triple-A ratings for the U.S.

And Sherry Cooper, executive vicepresident and chief economist of BMO Financial Group notes that S&P, which failed to see the U.S. housing meltdown coming, may be just buttcovering with a move that will allow it, depending on the outcome, to either say "I told you so" or take credit for prompting effective action with a timely warning.

Yet there's a huge issue here - $14.5 trillion in U.S. national debt growing at mind-boggling speed.

Now, is anybody taking steps toward a real solution?

Well, if they are, they're obscured by the political posturing that characterizes the debt debate both before the downgrade and after.

First was a drawn-out game of chicken over whether legislators would refuse to raise the debt limit and force the country to default.

Then it was a phoney deal to cut $900 billion in annual spending - no details on what or when - to get the necessary legislation passed. Now it's the exchange of simplistic hindsights, with the Tea Party maintaining a few trillion in cuts would have staved off the problem, and the Democrats countering that the whole thing stems from a math error because S&P got the numbers wrong.

This partisan sniping at the expense of action is worrisome for the world, especially Canada, which depends hugely on trade with the U.S.

Our fundamentals, particularly our public debt picture, is much better than theirs, but if their economy continues to hurt, so will ours.

Because, as former prime minister Pierre Elliott Trudeau noted, a mouse who sleeps with an elephant must worry when the big guy rolls over.

Especially when the elephant has reason to toss and turn.

Source: Don Cayo, Vancouver Sun


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