How the U.S. stalemate could hit Canada, from the mild to the brutal These are stories Report on Business is following Thursday, Oct. 10, 2013. Three scenarios Just about any way you slice it, the Washington stalemate is going to take a toll on Canada. The question is just how big a toll. Chief economist Avery Shenfeld of CIBC World Markets runs through the scenarios today, and the potential impact on the Canadian economy, from the mild to the severe. Here's what he finds: Scenario 1 (highly probable): The partial government shutdown runs no more than three weeks, with a spending plan and a lift to the debt ceiling "that pushes that issue off for at least several months." By studying the impact during the Clinton Administration, the shutdown would shave about 0.5 per cent from annualized economic growth in the U.S. in the fourth quarter, putting it at 2.3 per cent. That scenario "shaves perhaps one tick off Canada's Q4 growth rate." Scenario 2 (next in likelihood): The two sides strike a temporary agreement for spending and the debt limit - and the Republicans are expected to propose something along these lines today - but the result is more restraint than what's under discussion now. That would mean the same hit in the final quarter of this year, but also filter through to take a toll on the economy in 2014. Interest-sensitive domestic spending in Canada might actually grow a bit faster or at least no worse than in the base case, but exports and related capital spending could remain quite lacklustre. Scenario 3 (ugly and least likely): This would involve a "significant breach" of the Treasury Department's Oct. 17 drop-dead date for raising the debt ceiling. While that could be tolerated for a week or two (i.e. to October end), November would force Washington to either suspend some debt payments, or miss other economically significant payments (social security, Medicare, military pay, etc.), as overall spending would have to be trimmed by roughly 4 per cent of GDP on an annual basis. That's enough to risk at least a short-term recession in the U.S. And that's where it gets particularly ugly for Canada: If interest payments are missed, Treasury yields could spike, and the repo market could freeze up, representing a hit to financial sector liquidity. Given the scale of that shock, it could put Canada into recession or close to one. Canadian yields could actually drop as a result of both the economic slowdown and safe-haven flows into our fixed income market. Exporters would take the largest hit (both through volumes and weakness in commodity prices). Safe-haven flows might also lift the [Canadian dollar], further hitting exporters. It's what that would mean that makes such a scenario unlikely, Mr. Shenfeld says. Markets rally Global markets are rallying today, buoyed by hopes of ending the Washington showdown. It's Day 10 of the U.S. government's partial shutdown, and fears have been mounting that U.S. politicians may not agree to raise the debt ceiling before Oct. 17, after which the Treasury Department says it can't pay its debts. There are hopes today, however, that the warring factions could agree to at least a short-term solution, while President Barack Obama meets with the two sides over the course of the next two days. Optimism spread today, rippling through both stock and other markets. "An-across-the-board rally in the [U.S. dollar] has been the main theme amid increasing hopes for an imminent resolution to the current fiscal impasse," said senior currency strategist Sue Trinh of Royal Bank of Canada in Hong Kong. These hopes come ahead of a scheduled meeting between President Obama and House Republicans today and were spurred by a number of press reports suggesting a short-term debt deal is in train to allow time for broader negotiations on the budget. Stocks are having a nice bounce, as well. Analysts warn, however, that the showdown will return to haunt markets if the answer is indeed a short-term boost to the debt limit. All this essentially means is that negotiations will be delayed by a couple of months, at best, and we'll be back in the same situation again come Christmas, said market analyst Craig Erlam of Alpari in London. Unfortunately, though, under the circumstances that is a positive thing, not just for the financial markets but the global economy, which would suffer hugely if the U.S. was forced to default on its debt. Mr. Erlam is not alone. Matt Basi of CMC Markets in London said any move in the deadlock was certain to spark a relief rally in the markets, but reports of what the Republicans may propose suggest it may not be palatable for the Democrats and the president. "The other thing to note is that anything passed looks to at best stall, only to endure it all again in the near future," Mr. Basi said. So yet again it appears the job of the U.S. politician is simply to apply a strong foot to that poor old can on a never-ending road, rather than to find a cure. So for the markets ... relief yes, solution no. The Bank of England, meanwhile, made no changes to policy today. 911 needs emergency fix Canada's 911 system is plagued with numerous problems, including technology gaps, lack of oversight and inadequate funding, and is in dire need of an overhaul or risks falling apart as telecoms upgrade to new communications systems, a new report released today warns. The blunt assessment from a former regulator will form the basis of a sweeping consultation on the future of 911 services by the Canadian Radio-television and Telecommunications Commission, The Globe and Mail's Rita Trichur reports.