Canada’s federal government was watching closely and saying little Tuesday as a high-stakes race against the clock got underway in earnest at the White House, with the health of the global economy hanging in the balance.
President Joe Biden met with congressional leaders, including Speaker Kevin McCarthy, his chief antagonist in a protracted standoff over the debt ceiling — a legislative limit on the U.S. government’s borrowing power.
Treasury Secretary Janet Yellen warned last week that the current ceiling could be reached as early as June 1, at which point the U.S. would not have enough money at its disposal to pay all of its bills.
House Republicans say they won’t agree to raise the limit — once a routine procedural matter, now a frequent and all-too-familiar point of political tension — without significant cuts to government spending.
Following their meeting, Biden said the two sides would continue to meet, including another gathering on Friday _ but he insisted he would not entertain talk of spending cuts without a clean agreement to raise the borrowing limit.
“I’m a born optimist,” Biden said when asked why he remains convinced a deal can be reached.
“Everyone in the meeting has understood the risk of default: our economy would fall into a significant recession, it would devastate retirement accounts, increase borrowing costs … nearly eight million Americans would lose their jobs and our international reputation would be damaged.”
He said it’s possible but unlikely he would cancel plans to attend G7 meetings in Japan if the dispute persists, describing the impasse as the single most important thing on his agenda.
McCarthy’s message was more dire: he would not be moved. “I was very clear with the president: we have now just two weeks to go,” he said.
Politically, Canada is steering a wide berth. In practical terms, though, it’s in the same boat.
“In many ways, we are like a 51st state — we are joined at the hip with the U.S.,” said Andreas Schotter, a professor of international business at Western University’s Ivey Business School in London, Ont.
Canadian companies and institutions that sell products or services or lend money to the U.S. government would feel the impact of a default almost instantly, Schotter said, to say nothing of the effect on stock markets in both countries.
Interest rates, already on the rise, would shoot higher, hitting taxpayers and private borrowers hard. Demand for money-market securities like treasury bills would fall, hampering the U.S.’s ability to cover its soaring debt costs.
Schotter made clear that he doesn’t expect the U.S. to go off a fiscal cliff, although given the current political climate it will likely get close to the edge.
But for America’s number one trading partner and a bilateral relationship that’s worth $3.25 billion of business on a daily basis, the impact of a default would be deep and far-reaching, he added.
“A U.S. default, no one can afford.”
Despite the stakes, protocol demands that the rest of the world, including Canada, maintain a safe diplomatic distance from the fray.
“The potential consequences of a U.S. default on its debt would be global and discussions are ongoing among the president and the executive branch and Congress,” the Canadian Embassy said in a statement.
“Canada is following this issue very closely.”
Associate finance minister Randy Boissonnault would only say Tuesday that the standoff is a “sovereign issue” for the U.S. to deal with itself, although he did note that the G7 finance ministers would be meeting this week in Japan.
“The conversation of the finances, post-pandemic, for all of our democracies is an active conversation, so we’ll leave the United States to decide about its debt ceiling,” Boissonnault said.
“In our case, our fiscal position is the strongest in the G7, and so we’ll be continuing to manage the fiscal frame.”
The stage for Tuesday’s showdown has been set since January, when Yellen first warned that a default could be in the offing by early summer without raising the debt limit. Republicans who control the House say they won’t do it without spending cuts.
They’ve already narrowly passed largely symbolic legislation dubbed the Default on America Act, which would cap discretionary spending at 2022 levels, a reduction of at least $142 billion from 2023.
Biden has vowed to veto it — he called it “dead on arrival” Tuesday — should it somehow pass in the Senate, where 43 Republicans are standing with their House colleagues, demanding “spending cuts and structural budget reform as a starting point” in the talks.
Biden has refused to be drawn into negotiations, insisting that he won’t talk about cuts until the House first agrees to raise the limit with no strings attached.
“Republicans are holding the entire economy hostage and saying, unless their entire agenda gets done, they’re going to cause an unprecedented default,” White House press secretary Karine Jean-Pierre said Tuesday.
“What the president is doing is the opposite of that. He wants to make sure that we take that off the table and have a separate conversation.”
Daniel Pfeiffer, a former White House adviser to president Barack Obama, who twice wrestled with debt-ceiling talks during his two terms, offered a glimpse into Biden’s hardline strategy in a New York Times essay Monday.
Both Pfeiffer and Biden, Obama’s vice-president at the time, had ringside seats when the White House struck a “grand bargain” with House Speaker John Boehner in 2011, only to watch a renegade GOP caucus break with their leader.
“A painful lesson was learned,” Pfeiffer wrote. “Negotiating with the ticking clock of a global financial collapse was a losing proposition.”
Add to that mix the fact that House Republicans these days are dramatically more unpredictable than they were 12 years ago, and it’s no wonder Biden won’t deal, said Duke University politics professor John Aldrich.
“McCarthy is stuck with a very small party majority and some real fear that his right wing could turn on him (again) as speaker,” Aldrich said.
The president needs to walk a “narrow path” out of the standoff, one that will likely entail two separate bills, he said: one that raises the debt ceiling without conditions, and another with spending cuts to placate Republicans.
“This is a high-wire act, and it could easily go wrong,” Aldrich said. “The loss of credibility for the U.S. is damaging for all, and for a good while into the future.”
—With files from David Fraser in Ottawa