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Moody's downgrades Spain One wonders what it will take to get the euro zone to finally come up with a definitive plan.
Finance officials of the 17 countries in the monetary union meet tomorrow, and they're expected to endorse some elements of a proposal by Germany and France to deal with the group's economic woes. But this has been going on for how long now amid ever deeper divisions?
Driving home the urgency was a decision today by Moody's Investors Service to cut its rating on Spain's sovereign debt, a move that roiled global markets.
This comes as bond yields in the so-called periphery countries continue to spike, and as speculation mounts that Portugal will be forced to seek a bailout and that Greece could still default.
Moody's believes the cost of recapitalizing Spain's banks will top the government's estimate of €20-billion, and the Bank of Spain is scheduled to issue a report on capital levels later today.
"Confidence in Spain's estimate of bank capital shortfalls - to be released today - is so low that Moody's didn't feel compelled to wait for the tally before downgrading the country's rating a notch to Aa2, and putting it on negative outlook," said economists Derek Holt and Gorica Djeric of Scotia Capital.
"The government expressed surprised that Moody's didn't wait until after the estimate of capital short falls is released, but markets have long dismissed the Spanish government's estimate of capital shortfalls that has curiously been in place from the beginning of the exercise oriented toward estimating the shortfalls," they said in a research note.
"The government has stated that it doesn't expect the capital shortfall to exceed €20-billion, but Moody's is figuring on a tally of about two-and-a-half times that amount and some estimates go higher than that. Of added concern to Moody's is that while the Spanish government has made significant headway on imposing fiscal austerity, the regional governments - that control much of the key spending areas like health care - have not."
Pressure continues to mount on euro zone finance ministers as they prepare to meet in advance of a wider summit later this month.
"Finance ministers from the euro zone will confab tomorrow to come up with a plan to stabilize this sovereign debt crisis before it blows up in their faces ... again," said Carl Weinberg, chief economist at High Frequency Economics.
"Their recommendations will become the agenda on sovereign debt stabilization for the EU summit on March 24 and 25, which is being billed as the meeting that will come up with a definitive plan to stabilize the crisis.
"The ministers had better come up with something good this weekend, because Portugal may not make it to March 24 before needing assistance from the [euro zone bailout fund]and IMF to redeem a bond due on April 15."
Mr. Weinberg also noted the pressure on Greece to restructure, and pointed out the lack of definitive action by the group.
"As we write this morning," he said, "we have yet to hear of any single substantial idea that the governments might agree on to address the debt crisis or to increase the scope of [bailout fund]operations."
Separately today, the Bank of England held its key lending rate steady at 0.5 per cent.
- Spain hit by Moody's debt downgrade
- European debt crisis intensifies
- U.K. rates kept at record low despite inflation
TMX responds to banks The head of the Toronto Stock Exchange says he shares the two major concerns raised by a group of financial institutions opposing a proposed merger with the London Stock Exchange, but argues the issues have been addressed in the terms of the deal, The Globe and Mail's Janet McFarland reports.
In a statement issued today, TMX Group Inc. chief executive officer Thomas Kloet said he was concerned from the beginning with the need to protect Canada's "winning regulatory structure" while also ensuring Canadian management and board oversight.
The statement is Mr. Kloet's first public comment since a group of financial institutions, led by Toronto-Dominion Bank, signed a letter calling the merger bad for Canada and saying it would cause the country to lose regulatory oversight of its biggest stock exchange.
Separately, Streetwise columnist Boyd Erman is tweeting again today from the hearings into the deal.
- TMX CEO says merger deal already addresses banks' major worries
- TMX-LSE deal reveals Bay Street rift
- It's up to TMX to explain its deal
Canada's trade surplus shrinks A hefty rise in imports, to their highest level since November, 2008, far outpaced an increase in exports in January, narrowing Canada's trade surplus to $116-million from $1.7-billion in January.
Imports climbed 5.3 per cent, led by an increase in volumes of auto-related products to the tune of 16.6 per cent, Globe and Mail economics writer Jeremy Torobin reports today. Exports, which had surged almost 8 per cent in December, increased 0.8 per cent in January, Statistics Canada said. Again, a surge in exports of auto products, which climbed 18.4 per cent, led those gains.
"The mere fact that exports were able to record a 4th consecutive month of gains despite a Canadian dollar hovering around parity and after a 7.9-per-cent gain in December is certainly the most positive aspect of today's report," said Toronto-Dominion Bank economist Francis Fong. "In addition, continued strength in machinery and equipment imports reflects positively on the outlook for business investment in Canada."
The surplus with the United States narrowed to $3.8-billion from $4.3-billion, while the deficit with other countries rose to $3.6-billion from $2.6-billion as exports slipped 5.2 per cent.
"Over all, the report isn't too negative despite the drop in the surplus as two way trade continue to ramp up in line with the recovering global economy," said CIBC World Markets economist Krishen Rangasamy.
U.S. deficit swells In the United States, the trade defict widened in January to $46.3-billion (U.S.) from $40.3-billion, partly on high oil prices, but there were encouraging signs as exports reached a record high. Also playing into the data was U.S.-Canada auto trade, a good sign as it illustrates how the industry is rebounding. Imports of consumer goods also rose, for the first time in a few months.
"This jump in automotive trade reflects the ramping up of motor vehicle production in both the U.S. and Canada at the start of this year," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
"Admittedly, exports increased by 2.7 per cent in January, helped by a 13.4-per-cent rebound in automotive exports," Mr. Ashworth said.
"However, non-oil imports increased by an even bigger 5.1 per cent. Automotive imports increased by a similar sized 14 per cent ...The strength of imports also reflects a 5.3-per-cent surge in capital goods imports and a 2.2-per-cent jump in consumer goods imports. To the extent that this surge reflects the strength of domestic demand, particularly restocking, it isn't necessarily a disaster. Nevertheless, it is a concern, particularly when we know that the latest surge in the cost of imported oil will drive the deficit above $50-billion over the next few months."
Toronto-Dominion Bank economist Martin Schwerdtfeger said he expects that, over all, stronger consumer spending and business investment will push imports to the United States higher throughout the year, keeping pressure on the deficit.
"A relatively weaker U.S. dollar - the currency has depreciated roughly 6.8 per cent since its latest cyclical high in mid-2010 on a trade-weighted nominal basis - could provide some offset by boosting exports," he added. "However, if concerns regarding the European sovereign debt situation escalate and political turmoil in the Middle East and North Africa persists, the greenback will likely appreciate, eroding this recent competitiveness gain."
Chinese data soft China's trade numbers were something of a shocker today as the country posted a surprise deficit, skewed partly by Chinese New Year but also highlighting the effect of high commodity prices.
China's exports rose 2.4 per cent in February, well below what was expected, and imports surged 19.4 per cent.
Part of the problem, said Mark Williams, the senior China economist at Capital Economics in London, is that projections underestimated the impact of the New Year holiday, which came earlier in February than a year ago. But the impact of commodity prices is real.
"It is clear that a large part of the relative strength of imports is due to the increase in prices over the last year rather than any pick-up in real demand in China," Mr. Williams said.
"For example, the dollar value of iron ore imports in the first two months was double that a year ago, but only a fifth higher in volume terms. The value of copper imports was up a quarter in dollar terms, but the import volume was slightly lower.
"Over all, we estimate that China would have run a surplus of $16-billion (U.S.) over the first two months of the year if commodity prices were unchanged from a year ago, rather than the small deficit that was seen."
TD sees Flaherty staying the course Toronto-Dominion Bank expects Finance Minister Jim Flaherty will bring in a "stay the course" budget with nothing significant in the way of new spending, tax initiatives or cuts to transfers.
Helped by a better economic and fiscal outlook, Mr. Flaherty has some wiggle room to "listen to other federal party demands" in the March 22 budget, said chief economist Derek Burleton and economist Sonya Gulati.
They projected "status quo" deficits of $39.5-billion for fiscal 2010-2011 and $21.7-billion for 2011-2012. Ottawa, they said, is on track to return to a budget surplus in fiscal 2015-2016.
"Despite this improved leeway, the government faces significant medium-term fiscal challenges," the economists wrote.
"For one, the government's minority status in Parliament will likely necessitate some additional spending that will erode off a bit of the fiscal room ... Second, since the government continues to rule out tax increases, the revenue line can only inch up so much. To achieve budgetary balance then, the medium-term fiscal plan hinges on its ability to wrestle annual program spending growth down to an average 1.1 per cent per year through [fiscal 2015-2016]
"Such a feat would represent one of the most prolonged periods of federal fiscal restraint in the Post War era and coincides with a time when age-related spending pressures are intensifying."
Transat cites challenges Transat A.T. Inc. today cited a "challenging start to winter, but no shortage of travellers" as it posted a first-quarter loss of $13.5-million or 36 cents a share, compared to a loss of $13.9-million or 37 cents a year earlier. Its shares plunged.
Revenue climbed to $810-million from $792.6-million.
Looking forward to the second quarter, Transat noted that bookings and load factors are "superior" to a year ago, while ticket prices are about the same.
"On the summer transatlantic market, capacity and bookings are 10 per cent higher than last year; load factors and selling prices are similar," the Montreal-based tourism operator added.
"There is currently significant uncertainty surrounding oil prices and the upward pressure that this will have on the corporation's costs for the summer season. Transat has introduced additional fuel surcharges, and continues to use hedging instruments, in order to manage this risk."
Desjardins Securities analyst Martin Landry also noted the "disappointing news" of Transat warning that higher fuel costs will keep its second-quarter results close to the levels of last year.
In Economy Lab today
Does China's booming e-commerce market spell doom for bricks-and-mortar retail outlets? Not necessarily, Mitch Moxley writes.
This is something that should always be kept in mind in economic policy discussions: business groups are pro-BUSINESS, not pro-MARKET, Stephen Gordon writes.
In Personal Finance today
Unhappy with how much you're paying for home and car insurance? It pays to shop around. Rob Carrick explains how to find the best deal.
An Employee Profit Sharing Plan will provide beneficiaries with annual allocations based on profits of your business. Tax Matters columnist Tim Cestnick explores the benefits.
What we do before, during, and after our trip to the grocery store could make all the difference to our total savings, writes Angela Self.
From today's Report on Business