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Why the next U.S. debt calamity (in 91 days) could be worse

These are stories Report on Business is following Thursday, Oct. 17, 2013.

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Happy New Year
The U.S. fiscal crisis that ended last night won't even be that distant a memory by the time the next one promises to begin.

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Here's how things look today: As The Globe and Mail's Kevin Carmichael reports, a truce came via a Senate deal yesterday to end the U.S. government's partial shutdown and lift its debt ceiling. That was then passed and signed.

But the government's spending authority is restored only until Jan. 15. The ceiling is raised, allowing the Treasury Department to sell debt, but only until Feb. 7. In the meantime, there will be negotiations toward a longer-term budget.

All of which means there's further trouble well before the dawn of Jan. 15, which is just 91 days away if you include today.

And next time, some analysts warn, the fight could be uglier, vexing markets again and angering foreign governments whose economies are collateral damage.

"Talk about kicking the proverbial can down the road," said senior analyst Michael Hewson of CMC Markets in London.

"The only difference is we get to use the phrase with respect to the U.S. instead of Europe," he added.

"Isn't irony sweet, and now we can look forward to more broken politics in 2014, when the Tea Party is likely to be much more strident in its tactics, having lost badly this time around. Oh, joy, Happy New Year, everybody."

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Mr. Hewson believes there's a good chance that things become even more adversarial next time as the Republicans lick their wounds.

He's not alone.

"I just don't see what kind of compromise you could reach given how the lines are so drawn," said geopolitical analyst Pierre Fournier of National Bank of Canada.

"I'm not saying they won't come to an agreement … but the most likely scenario is another period of brinkmanship."

Not everyone sees it necessarily playing out that way, however.

"Of course this is only a temporary solution, and more hard work needs to be done to avoid another standoff in the new year," said senior economist Sal Guatieri of BMO Nesbitt Burns.

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"But the political damage to the GOP could see it play nicer in the sandbox, for fear of losing their majority in the House in the November 2014 elections," he added.

"The president's approval rating has also taken a licking … which means the Democrats might not want to push their luck, either, in the next round of negotiations. Americans are simply fed up with the congressional bickering and its ongoing impact on the economy."

According to Standard & Poor's, which stripped the U.S. government of its triple-A rating after the last battle, the government shutdown cost the U.S. the equivalent of $24-billion (U.S.) in lost economic output, shaving 0.6 per cent from fourth-quarter growth, expressed at an annual rate.

S&P, too, is troubled by the temporary nature of the deal, warning of the impact before the agreement was actually reached based on word of what it would contain.

"The short turnaround for politicians to negotiate some sort of lasting deal will likely weigh on consumer confidence, especially among government workers that were furloughed," S&P said.

"If people are afraid that the government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they'll remain afraid to open up their checkbooks."

President Barack Obama today lamented Washington's "manufactured" crises.

"At a moment when our economic recovery demands more jobs and more momentum, yet another self-inflicted crisis set our economy back," he said.

What observers say about the U.S. deal
"So we have 'a deal.' In the end, the original 17 October deadline was the one the politicians worked to. The debt ceiling is increased until February, when they can, if they want, do it all over again. Now, we can ponder how much economic momentum has been lost, how much confidence is hit by the long-term uncertainty the politicians have built into the system, and how this affects monetary policy. This episode has been bad for Washington, bad for growth, bad for the dollar and good for carry." Kit Juckes, Société Générale

"We assumed that a three-week shutdown would shave 0.5 percentage points from Q4 GDP growth. Despite the slightly shorter closure (16 days), we still look for overall growth to come in at 2.5 per cent, as the impact of fiscal uncertainty on business confidence suggests a downside risk. We'll assess this risk as the flood of delayed data comes in over the next few weeks." BMO's Mr. Guatieri

"The government shutdown was already costing the U.S. economy about 0.2 percentage points a week in annualized GDP. And going through the debt ceiling would have resulted in an even more significant hit, equivalent to around 4 per cent of GDP annualized, as it would have forced the government to immediately run a balanced budget. Avoiding that worst-case scenario means we don't have to change our forecast for Q4 GDP, which we already trimmed to 2.3 per cent based on the assumption of a two- to three-week shutdown. But kicking the can only a few months down the road risks added uncertainty in early 2014, particularly with recent history not exactly inspiring confidence that a long-term spending agreement will be reached by mid-December." Andrew Grantham, CIBC World Markets

"The agreement is setting up a prolonged the fiscal policy debate – and the policy related uncertainty could well push out expectations for Fed tapering. The house view at Scotia is that we expect tapering in January. Our rationale when we formed that view last month was that U.S. budget negotiations would probably be inconclusive - and move the fiscal debate into 2014. Today's developments increasingly point to that possibility. Moreover, even at that, with the government only funded until Jan. 15 and the debt ceiling only lifted until February, it's entirely possible that the Fed might be looking at the same type of fiscal impasse at the January 28-29 meeting as it was looking at in September – and that tapering expectations could be pushed out further." Derek Holt, Dov Zigler, Bank of Nova Scotia

"Once the uncertainty surrounding a U.S. downgrade passes, some form of normality can return to the markets and investors can focus on what they should be concerned with, earnings and economic data. Although, the Fed is going to continue to play its part for a little while yet, with the recent government shutdown likely to delay tapering until December at the earliest." Craig Erlam, Alpari

"The press have certainly made their feelings towards politicians clear, and it's true they have not exactly covered themselves in glory, but this is also a systemic issue at the heart of the U.S. political system, and you have to wonder how dire things need to get before anything is addressed. The U.S. is the hub of the world economy, and with that comes great responsibility. The system must allow key decisions of this nature to be made without stalling in the name of political one-upmanship." Toby Morris, CMC Markets

Lenovo said to eye BlackBerry
China's Lenovo Group is pondering a takeover bid for BlackBerry Ltd., joining a growing list of potential suitors, The Wall Street Journal reports today.

While others are circling the troubled smartphone manufacturer, only Canada's Fairfax Financial Holdings Ltd. has struck a tentative deal, one valued at $4.7-billion (U.S.) or $9 a share.

Among the other known interested parties are BlackBerry co-founders Mike Lazaridis and Doug Fregin, and U.S. private equity firm Cerberus. Industry players including Google Inc., Cisco Systems Inc. and SAP AG are also reportedly kicking the tires.

The Wall Street Journal says Lenovo has signed a confidentiality agreement that will give the Chinese company the ability to scour BlackBerry's books.

Google on rise
Google shares climbed in after-hours action today as the Internet giant posted a 12-per-cent jump in third-quarter revenue and beat analysts' estimates.

The stock was up by about 8 per cent.

Google revenue rose to $14.9-billion (U.S.) as profit surged to almost $3-billion or $8.75 a share from $2.2-billion or $6.53.

Operating income rose to $3.4-billion from $2.7-billion.

"We are closing in on our goal of a beautiful, simple, and intuitive experience regardless of your device," said chief executive officer Larry Page.

The company, by the way, is sitting on more than $56.5-billion in cash.

GM to keep plant open longer
General Motors Co. will keep one of its two Oshawa, Ont., assembly plants open two years longer than expected, The Globe and Mail's Greg Keenan reports.

The move is designed to meet projected demand for the Chevrolet Impala and Chevrolet Equinox models, which are assembled at the consolidated plant in Oshawa. The consolidated plant assembles an older version of the Impala for fleet customers, while the neighbouring flexible plant builds the redesigned 2014 model of the full-sized sedan.

The consolidated plant was originally scheduled to close in August, 2014.

GM agreed during contract talks with the Canadian Auto Workers union last fall to extend production to 2014 using one shift of workers. That was a year later than the plant's original closing date of 2013.

The move will preserve about 700 jobs at the consolidated plant through 2016.

Goldman Sachs slips
Shares of Goldman Sachs Group Inc. slipped today after the Wall Street giant posted a small gain in third-quarter profit and a drop in revenue.

Goldman Sachs earned $1.5-billion (U.S.) in the quarter, or $2.88 a share, diluted, compared to $2.85 a year earlier. Revenue sank to $6.7-billion from $8.4-billion a year earlier. Like other banks, Goldman suffered a hit in bond trading revenue.

The bank also hiked its quarterly dividend by a nickel to 55 cents.

Chief executive officer Lloyd Blankfein cited "slow client activity" for the third-quarter showing, but pointed to what could be a pickup.

"We saw various signs that our clients are prepared to act on significant transactions and we believe that the firm is well positioned to help our clients accomplish their objectives," he said in a statement.

"As longer-term U.S. budget issues are resolved, we could see an improvement in corporate and investor sentiment that would help lay the basis for a more sustained recovery."

Verizon gains
Okay, maybe Verizon Communications Inc. doesn't need Canada, after all.

America's biggest wireless carrier beat analyst estimates today as third-quarter profit climbed to $2.2-billion (U.S.) or 78 cents a share from $1.6-billion or 56 cents a year earlier.

Revenue increased to $30.3-billion from $29-billion and, notably, its subscriber base grew by 927,000.

Verizon had plans to move into Canada, with a tentative summer bid for Mobilicity and an initial offer for Wind Mobile, but changed its mind, particularly after striking a $130-billion deal for Vodafone Group PLC's stake in their joint venture.

IBM sinks on earnings
Shares of IBM Corp. sank today, dragged lower by its third-quarter earnings report late yesterday.

IBM posted a profit of $4-billion (U.S.) or $3.68 a share, compared to $3.8-billion or $3.33 a year earlier. But revenue of $23.7-billion slipped, missing analysts' estimates.

Chief executive officer Ginni Rometty said she's still confident in IBM's projection of operating earnings per share of at least $20 in 2015.

"We are taking action to improve execution in our growth markets unit and in the elements of our hardware businesses that are underperforming," Ms. Rometty said.

Winnebago climbs
Don't look down your nose at trailer parks: Shares of Winnebago Industries Inc. surged today after the RV maker posted a 32-per-cent jump in fourth-quarter revenue today.

Winnebago profit slipped in the quarter to $10.6-million (U.S.) or 38 cents a share from $40.9-million or $1.41 a year earlier, though the latter included a hefty tax gain.

On an operating basis, Winnebago's profit climbed sharply.

Chief executive officer Randy Potts cited greater consumer and dealer demand for what he called "our exception growth" over the course of the fiscal year.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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