These are stories Report on Business is following Wednesday, April 18, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.
Debt, debt, and more debt The Bank of Canada today paints a troubling picture of what has become a vicious circle where consumer debt is concerned, and amid weak underwriting standards on some home equity lines of credit.
The central bank unveiled its Monetary Policy Report, which puts more flesh on the bare bones statement it unveiled yesterday when it held its benchmark overnight rate steady at 1 per cent, but signalled that it's thinking about hiking interest rates again, given a better outlook for the economy.
As The Globe and Mail's Jeremy Torobin reports, the report indeed projected better-than-expected economic growth, though it also cited the risks the recovery faces.
It also expanded on Governor Mark Carney's warnings over household debt, which have climbed in Canada to record levels, citing a low savings rate, "large and persistent increases" in house prices, and strong levels of real estate investment.
"It is not surprising that households would seek to consume some fraction of their increase in housing wealth, either by extracting higher housing equity to spend or by consuming more out of current income because they feel wealthier; either of these would result in a lower measured personal savings rate," the central bank's study said.
"Empirical estimates of the total marginal propensity to consume out of housing wealth in Canada range from 6 per cent to 16 per cent over the long run, assuming that the increases in wealth are viewed as permanent. This housing wealth effect on consumption may have increased over time, as financial innovations have made it easier to borrow against increased home equity."
The report also repeated Mr. Carney's warning that consumers are expected to add to their already fat debt burden, which remains the biggest threat in Canada.
The Bank of Canada appears most concerned over the tremdendous growth in home equity lines of credit, or HELOCs, and mortgage refinancings, which surged to $64-billion in 2010 from $8-billion in 2001.
About half of that is being used either to spend or pay off other loans. Here's where the vicious circle comes in:
"Surveys suggest that approximately half of this equity extraction is used either for current consumption or to pay off other debt, much of which will be higher-rate debt, itself used to finance past consumption. Overall, it is estimated that home-equity extraction has funded roughly 3 per cent of aggregate consumer spending in Canada in recent years, up from less than 1 per cent in 2001."
And note this warning: "Home equity extracted through additional borrowing cannot fund higher consumption indefinitely. Once the proportion of homeowners that access higher housing wealth through HELOCs reaches its peak, the personal savings rate can be expected to rise. This implies a lower level of consumption relative to income. With less equity in their homes, households would also be more exposed to a decline in house prices, which could further dampen consumption."
Mr. Carney expanded on that at a news conference, saying there's good and bad where HELOCs are concerned, notably in swapping credit card debt for cheaper loans. The trouble, though, is when that goes too far. And in some cases, he added, some of it has been done "in a context of underwriting standards that are less than optimal," which Canada's banking regulator is addressing.
"More broadly, it’s part of the bigger picture of driving Canadian household debt levels to record levels and levels that we see over the course of our projection continuing to rise," he said.
"There are good aspects of it, but it contributes to a broader issue where some Canadian households are becoming overstretched and Canadian households as a whole are being overstretched, which creates risk for the economy.”
Some economists believe the central bank may address the household debt issue through rate hikes. Finance Minister Jim Flaherty has already tightened mortgage rules, and is loath at this point to do it again.
"To be sure, the case for rate hikes is strong," said Paul-André Pinsonneault and Krishen Rangasamy of National Bank.
"With the government deciding not to intervene to cool down the hot housing market and curb household leverage, the BoC will have to address on its own the 'biggest domestic risk.'" And given that fiscal drag isn't likely to be as large as first feared (based on the recent federal budget), the BoC has flexibility for rate action."
- Carney cautious amid better outlook
- Canadian economy sideswiped by high world oil prices: Bank of Canada
- Stephen Gordon's Economy Lab: Why on earth was Bay St. surprised by rate signals?
- Read the Bank of Canada report
- Deal quickly with your debt: Mark Carney's serious now
- Household debt is 'biggest domestic risk': Bank of Canada
Why Carney should stay Mr. Carney was, of course, also asked about a Financial Times report that said he was asked about the possibility of jumping ship to the Bank of England. He dismissed this today as inaccurate.
"I’m totally focused on my two responsibilities as governor of the bank and chairman of the FSB and I can assure you that they add up to more than every waking hour of the day," said Mr. Carney, referring to his other post as chief of the Financial Stability Board.
The newspaper reported late yesterday that Mr. Carney had been approached informally by a member of the Bank of England's court, which oversees the central bank, asking about the possibility of him replacing Mervyn King as governor in the summer of 2013.
There's already a favoured internal candidate, the newspaper said, though some in the British government think a shakeup might be in order given what was deemed to be a weak response by the Bank of England to the financial crisis.
Mr. Carney is respected around the world. He was born and raised in Canada - in Fort Smith, NWT, and Edmonton, respectively - and studied at Harvard and Oxford. While he would be an outsider at the Bank of England, he does know London, where he worked for Goldman Sachs Group Inc. for a time, and observers note that his wife, an economist, is British.
The FT story was certainly making the rounds on Twitter. Nicola Duke, for example, an independent crude futures trader in London, had this to say: "Leaks re Carney for Merv's job seem like campaigning, Why would UK have a foreigner for Gov of BoE or is Goldmans only nationality you need?"
It is, of course, unclear how this story came about. And it's still on the news organization's website, unchanged. Whatever's going on there, to add to the two reasons already cited by Mr. Carney, here are 12 more:
1. He'll actually get a chance soon to play with interest rates. Given Britain's outlook and its jobless rate of 8.3 per cent, it's going to be a while before the Bank of England does anything.
2. Canada's economy is expected to outpace that of the U.K. While Mr. Carney clearly loves a challenge, at least he's got something to work with here.
3. The canal may not be the Thames, but you can skate on it.
4. I've never played cricket, but hockey is surely more exciting.
5. I've never had lunch with Laureen Harper, either, but I'd bet it's more fun than lunch with the Queen.
6. Where else can you find a currency nicknamed the loonie?
7. You just never know how things play out. What if Iceland ever actually did adopt the loonie as its currency? Mr. Carney could have a colony of his own.
8. The Canadian government does not own Royal Bank of Canada. Unlike the British government and Royal Bank of Scotland.
9. Can you "mush" dogs in Britain? I don't think you can even hunt foxes anymore.
10. Canada's banks are poised to take over the Toronto Stock Exchange. They kept the TSX out of British hands, so why not the Bank of Canada governor?
11. Entirely different terminology in Britain, and you wouldn't want to slip up. A shag carpet is not the same there.
12. One of the other officials in the running, according to the Financial Times, is Gus O'Donnell, a former permanent secretary to the Treasury, who was oft known by his initials, GOD. In Canada, Mr. Carney already holds that distinction.
Security officials worry about telecom sector Canada's intelligence community is fretting over the government's plans to open the door to more foreign investment in the telecom industry, warning of security risks.
"The security and intelligence community is of the view that lessening or removing restrictions from the Telecommunications Act, without implementing mitigation measures, would pose a considerable risk to public safety and national security,” Daniel Lavoie, a senior Public Safety Canada official, said in a letter to Industry Canada that was obtained by Bloomberg News under access-to-information laws.
The Feb. 25 document was marked "secret" (though it couldn’t have been that secret), the news agency reports today.
Public Safety Canada is the government arm responsible for co-ordination among the various entities involved in national security. It was created in 2003 and brings together groups like the Mounties, the Canadian Security Intelligence Service, the Canada Border Services Agency and others.
The Canadian government recently unveiled plans to let non-Canadians fully own telecoms that hold a market share of 10 per cent or less.
Just as one example, those changes would allow Amsterdam's VimpelCom to launch a formal takeover of Wind Mobile, one of the upstarts that began operating after Canada first opened the sector, which is dominated by three players, to more competition.
A spokeswoman for Public Safety Canada told Bloomberg that the telecom sector must be "safe and secure."
Couche-Tard heads for Norway Quebec's Alimentation Couche-Tard Inc. is gaining an entrance to new European markets with a $2.8-billion (U.S.) deal for a major Norwegian company.
Couche-Tard said today it has struck a deal for Statoil Fuel & Retail ASA, which it described as the top Scandinavian convenience and fuel retailer, with more than 100 years in the region.
Not only will Couche-Tard take a leading place in Scandinavia and the Baltic region, but also in Poland.
"Moving into Scandinavia and Europe is an important step in implementing Couche-Tard’s growth strategy,” said chief executive officer Alain Bouchard.
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