Uncertainty over U.S. budget rattles markets

North American markets headed lower on Monday in reaction to a possible partial shutdown of the U.S. government.

In Toronto, the S&P/TSX composite index closed down 56.89 points to 12,787.19 as worry about the economic effect of such a shutdown depressed most sectors.

A notable exception was the real estate sector, which ran ahead 1.9 per cent as Brookfield Property Partners LPannounced it wants to buy out other shareholders of Brookfield Office Properties Inc.in a stock-and-cash deal it valued at$5 billion US.

The Dow Jones industrial average fell 128 points to close at 15,129,The Standard-and-Poor's 500 index lost 10 points to 1,681, and the Nasdaq fell 10 points to 3,771 as uncertainly rattled the markets.

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Traders were reacting to the possibility that lawmakers won't be able to agree on a compromise budget deal, setting the stage for a removal of non-essential government services starting at midnight.

The Republicans who dominate Congress want to cut off funding for key parts of President Barack Obamas new health-care lawand repeal a tax on medical devices and are holding up approval of routine government borrowing until they get what they want.

The Democrat-led Senate voted 54-46 this afternoon to reject a proposal from House Republicans to delay some portions of the health-care plan by a year.

If no compromise can be reached by midnight, about 800,000 federal workers would be forced off the job without pay, though members of Congress and the military are deemed essential and will continue to be paid. Critical services such as patrolling the borders, inspecting meat, health care and controlling air traffic also would continue.

The effect of throwing so many people out of work is expected to hit the U.S. economy and slow both consumer spending and opportunities for businesses involved with government work. There also could be long lines at the border as customs officials

Impact in Canada

Canadian Finance Minister Jim Flaherty warned of the potential impact in Canada.

It is my hope that Congress and the White House come to a resolution regarding the current spending and debt limit impasse, and that they will also develop a plan that will put the U.S. fiscal position on a long-run sustainable path," he said in an email statement to CBC News.

"This is a reminder that while Canadas economy remains strong, we are still vulnerable to uncertainties outside of our borders, especially in the US and Europe. In Canada, we are focused on the priorities of Canadians jobs, growth and long-term prosperity. Global uncertainty reminds us how important it is to maintain that focus," he wrote.

The U.S. economy will suffer,said BMO Capital Markets senior economist Michael Gregory.

"According to some studies, each couple weeks of shutdown will reduce real GDP growth by 0.3 percentage points." An even more worrisome deadline is Oct. 17, when the U.S. government hits its debt limit and will begin running out of cash to pay its bills.

"Although it's unclear what the net effect will be, technical default still looms unless the debt limit is lifted," added Gregory.

It will take time for the impact of a shutdown to hit the U.S. economy and the markets arent more spooked because theyve seen it all before.

The U.S. has reached this point 17 times since 1977 and one shutdown, under Bill Clinton, lasted 28 days.

It costs money to prepare for a shutdown, to carry it out, and start the government back up again. The last two shutdowns, which took place weeks apart in late 1995 and early 1996, cost taxpayers $1.4 billion, according to estimates from the Office of Management and Budget.