Financial Intermediaries

Debt default is a term to describe the inability of a consumer or a government to fulfill its obligations for the given period of time. A consumer debt default is applied to a single borrower or a household and may be subject to restrictions imposed by the government, for instance, if a person goes into bankruptcy, he may lose all his credit worthiness, his assets may be seized by the respective bank and sold to pay off his obligations, etc. However, a government default is the refusal or the failure to pay off the debt owed to creditors. It is not obligatory for a government to repay its bondholders or other creditors since it is foreign debt and a government controls its own affairs. Lending countries, on the contrary, can push the debtor for a payback and can enforce their ‘creditor rights’.

United States defaulting on its debt may put the entire world economy at risk. The fact that the global economy is so interconnected will lead to further deterioration and may hamper its efforts to bring it back onto track. In a Financial crisis, governments gradually and steadily lower their interest rates and this is exactly what the Canadian government will be forced to do. The US default may detour the investors to Canadian shores where the economy is relatively stable, leading to a downward pressure on the bond yields and appreciation in the value of the Canadian Dollar. However, the lower long term borrowing will keep the borrowing costs low and provide some scope for the Canadian government to get back on its feet (Alini, Erica).

A US default may have several repercussions on the Canadian economy which is already going through a household and mortgage debt situation. Canada Housing and Mortgage Corp., an agency that insures mortgages to approved buyers has set a threshold of 30% of total household income going towards housing. Anything exceeding the limit may put the buyers at risk of defaulting or not being able to pay its monthly mortgage payments. In addition,...