Canada would be impacted if Washington lawmakers can’t come to an agreement on raising the U.S. debt ceiling in time, economists say, though the severity would depend on how long the standoff lasts.

“Even though it may seem like a far-off, distant issue, it can have real implications for Canada if this game of chicken ends badly,” Doug Porter, chief economist at BMO Capital Markets, told in a Tuesday telephone interview.


The debt ceiling puts a cap on U.S. government borrowing. If the government reaches that US$31.4 trillion debt limit, it will be unable to meet all its payment obligations – a scenario U.S. Treasury Secretary Janet Yellen has warned could become a reality by June 1.

Without a deal, the U.S. government could find itself unable to pay recipients of government cheques or ultimately default on its debt, leading to a possible “economic and financial catastrophe,” according to Yellen.

Democratic U.S. President Joe Biden and Republican House Speaker Kevin McCarthy have been meeting to try to find common ground on how best to raise the debt ceiling, but as of Tuesday the two sides have not reached an agreement.


Without being inside discussions, it’s difficult to tell how much of the delay can be chalked up to “political posturing,” or whether there are irreconcilable differences, Porter said. U.S. debt ceiling negotiations have become increasingly politicized in recent decades, with disputes causing disruptions in the 1990s and mid-2000s.

Avery Shenfeld, chief economist at CIBC Capital Markets, said while markets are betting on a deal being reached as has historically played out during similar showdowns, this particular standoff appears particularly tense.

“This one has seemed a bit more risky just because of how far apart the two sides are and the intransigence on both sides of the political aisle towards a compromise,” he said by phone, adding that CIBC expects a deal with come at the last minute or shortly after deadline.

While Porter said he believes the Democrats and Republicans will come to an agreement in time given the potential serious repercussions for not doing so, he said it’s possible that there could be “a little bit of turbulence at the last minute” in the event of an 11th-hour deal.


If the deadline passes with no agreement, Porter said it may not last more than a day – but even then, the biggest impact on Canada from a U.S. debt ceiling impasse would be in the financial markets.

“If there is some real turbulence around financial markets, I think that would spill over into ours,” he said.

He noted that a fierce partisan battle over the U.S. debt limit had negative market impacts throughout the summer of 2011, as the world was still recovering from the 2008 recession.

Shenfeld said he expects there would be “major volatility in financial markets globally” if the deadline is missed even by a week or a few days.

“In all likelihood, there would be a lot of market turmoil, because we won't know it's only a week until it's all over,” he said.


A longer debt-ceiling related shutdown would have far more negative effects, the economists said, though neither was anticipating that outcome.

“If we went into a full default and an extended shutdown of a lot of the U.S. government, our major trading partner would fall into a significant recession that would inevitably blow back across the border,” Shelfeld said. “The scale of this would be big enough to put Canada, in all likelihood, in a recession as well.”

However, he added that the scale of a debt-ceiling economic downturn “depends a lot on how long it lasts.”

“If it’s a week, we’re not going to have a one-week recession in Canada,” he said. “Getting down to the wire and then reaching a deal would be quickly forgotten in terms of the economic impact.”

Porter agreed that a longer shutdown would be more severe, with the potential “to trigger a downturn” or a major contraction in the U.S. economy, with effects spilling over into Canada.

“I seriously don't believe that's going to happen, but … we can't completely rule it out,” he said.