U.S. likely to default on debt; Canada facing economic slowdown: Peter Kinch

“There is little hope that the Democrats and Republicans will be able to resolve their differences in a little over a week and the impasse resulting from the political game of chicken will result in a downgrading of U.S. debt, followed by a further blow to an already fragile U.S. recovery,” he told CRE Online.

Standard and Poor’s has warned that if the American leaders do not come to a compromise and raise the debt ceiling past its current limit of $14.3 trillion by its legislated deadline of Aug. 2, the U.S.’s debt rating will be downgraded. If that happens bond yields will rise to meet investors’ demands for greater returns to hold riskier U.S. debt. And an increase in bond yields means interest rates for consumers will also rise, making mortgages, car payments and student loans much more expensive to maintain.

Since the Bank of Canada’s five-year bond yields are closely tied to the U.S.’s, Canadians are unlikely to escape the economic effects of an American default.  

“Unfortunately, we are not immune to the U.S. woes up here in Canada and will likely face an economic slowdown of our own,” Kinch said. “So as Canadians, we can choose to do one of two things: either fret over it, or take action.”

To avoid the crippling effects of higher interest rates, Canadians must start reducing their debt more quickly, Kinch said.

“My advice is to take action. You can’t do anything about what will transpire over the next six months in the global economy, but you can use this as an opportunity to take control of your personal finance,” Kinch said.  

While higher U.S. five-year bond yields could translate into higher interest rates, Kinch said the volatility in the global economy will likely give BoC Governor Mark Carney pause about raising the bank’s key lending rate at his next announcement on July 19.

“This will give homeowners and potential buyers a prolonged period of lower rates, but Canadians need to understand that these low rates won’t last forever, and if there is a double-dip recession as a result of the global issues, you will be far better off facing it with a stronger equity position,” Kinch said. “Therefore, I cannot emphasize enough the importance of using this low rate environment as an opportunity to accelerate your debt reduction.”

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