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Corporate debt: when cheap is expensive (can akat/iStockphoto)
Corporate debt: when cheap is expensive (can akat/iStockphoto)

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Fat consumer debt biggest risk in Canada, Mark Carney says Add to ...

These are stories Report on Business is following Thursday, March 8, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Bank of Canada cites debt High consumer debt levels pose the biggest threat in Canada, the central bank warned today as it held its benchmark rate steady.

Bank of Canada Governor Mark Carney has oft warned Canadians that they must bring record household debt levels into line, and he did so again today, The Globe and Mail's Jeremy Torobin reports.

"Canadian household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk," the central bank said in its statement.

"Net exports have been supported by stronger-than-anticipated U.S. activity but are expected to contribute little to growth, reflecting still-moderate foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar," it added.

Mr. Carney and his rate-setting panel held their benchmark overnight rate at 1 per cent, for the 12th time in a row, while noting that recent evidence indicates a better outlook than it had projected just a couple of months ago. This indicates rates could rise again sooner rather than expected earlier, some economists believe, though others still think the central bank's next move will be to cut.

"The message is clear: while rates are unlikely to increase in the near term, the next move is more likely to be up rather than down, and could well emerge sooner than we currently anticipate (2013Q4)," said senior economist Sal Guatieri of BMO Nesbitt Burns.

While rate hikes don't appear imminent, the signal from the central bank is that they are on the horizon, a further warning for those who are drowning in debt.

Consumer debt has become the issue in Canada, and many have warned that a financial shock could put many at risk. The ratio of debt to personal disposable income, a key measure of where a consumer stands, stands at a record or almost 153 per cent.

"The comments reflect at least an indirect concern about the build-up of household debt and we expect to see more focus on this going forward," said Mark Chandler, chief of fixed income and currency research at RBC Dominion Securities.

As The Globe and Mail's Grant Robertson writes in today's Report on Business, Bank of Montreal has raised the stakes on the mortgage front, sparking anew a competitive battle among Canada's major banks, by reintroducing historic low rates.

The European Central Bank also held its benchmark rate unchanged at 1 per cent today, while the Bank of England held steady at 0.5 per cent. Central banks in New Zealand, Indonesia and South Korea also held steady.

Brazil was the big surprise. After disappointing data on economic growth earlier in the week, its central bank slashed its key rate by three-quarters of a percentage point, or 75 basis points, to 9.75 per cent.

"The move was slightly more aggressive than the anticipated 50-basis-point cut," said Benjamin Reitzes of BMO Nesbitt Burns. "Brazil has cut rates 275 basis points since August as inflation has cooled in order to boost growth."

Europe in the mud As he held his key rate steady today, ECB President Mario Draghi said he sees some signs of stability in Europe's economy, though activity is "still at a low level" and the outlook is uncertain.

"Looking ahead, we expect the euro area economy to recover gradually in the course of this year," Mr. Draghi told reporters.

"The outlook for economic activity should be supported by foreign demand, the very low short-term interest rates in the euro area, and all the measures taken to foster the proper functioning of the euro area financial sector. However, the remaining tensions in euro area sovereign debt markets and their impact on credit conditions, as well as the process of balance sheet adjustment in the financial and non-financial sectors, are expected to continue to dampen the underlying growth momentum."

The euro zone's economy contracted by 0.3 per cent in the fourth quarter, and the ECB projects overall output this year at between a contraction of 0.5 per cent and growth of 0.3 per cent. Next year also looks soft, at between zero and 2.2 per cent.

Markets rally Global markets rallied today as investors bet a crucial Greek debt swap will be successful.

The final results of the bond swap won't be known for some time yet, though today is the deadline for creditors to sign on, and many have already done so. Having said that, Athens has a target to reach and that outcome is far from clear yet.

Greece is optimistic the exchange, part of a sweeping program to ease its debt crisis, will succeed lest it face default as a March 20 bond redemption looms. The percentage of those signing on is now to said to be in the range of 70 to 75. Greece wants up to 90 per cent.

As we've seen often in the two-year-old debt saga, what Greece hopes for doesn't necessarily mean anything, as The Globe and Mail's Eric Reguly reports today.

Still to come is whether Greece will have to resort to what are known as collective action clauses, or CACs, which were put in retroactively and would force the deal on holdouts, and whether an industry body determines that constitutes a default, in turn triggering insurance payouts.

The stakes are high, to put it mildly.

"Later this evening it is to be hoped that we will see the first stages to a conclusion of the long running Greek debt swap saga with the likelihood that Greece will have to trigger the newly installed collective action clauses (CACs) and be the first European sovereign country to default on its debts," said senior market analyst Michael Hewson of CMC Markets.

"A minimum of 95 per cent of all bondholders must accept the terms for any deal to be counted as 'voluntary,' and early indications suggest that this number will fall short," Mr. Hewson warned.

"If the CACs are invoked then the International Swaps and Derivatives Association (ISDA) will have no choice other than to declare a default, or run the risk of causing a run on the rest of the European bond market, and destroying the credibility of the [credit default swap]market."

For now, though, markets are happy again.

"Hopes of a final deal on the Greek bond swap and strong corporate earnings have put the fight back into markets," said Chris Beauchamp of IG Index in London. "Banks are up on expectations that Athens will be able to corral a sufficient number of bondholders to avoid activating the collective action clauses, while miners keep recovering lost ground from Tuesday's selloff."

CIBC profit climbs Canadian Imperial Bank of Commerce posted a higher first-quarter profit today, and formally announced the sale of its mortgage broker business.

CIBC earned $835-million or $1.93 a share in the quarter, compared to $763-million or $1.80 a share a year earlier, The Globe and Mail's Grant Robertson reports. Profit excluding one-time items beat the forcasts of analysts.

Unlike some other banks, it held its dividend steady. CIBC is also selling FirstLine, its mortgage brokerage.

Canadian Natural boosts dividend Canadian Natural Resources Ltd. hiked its dividend by 17 per cent today as its swung to a first-quarter profit.

Canadian Natural posted a quarterly profit of $832-million, or 76 cents a share, compared to a loss of $309-million or 28 cents a year earlier.

"We exited 2011 with improved balance sheet metrics, increased financial liquidity and a strengthened ability to create value for our shareholders through the development of our diverse asset base," said chairman John Langille.

The company's cash flow climbed 31 per cent to $2.2-billion, deemed strong by analysts.

Canadian Natural's quarterly dividend now rises to 10.5 cents.

Air Canada vs. pilots The Air Canada Pilots Association says management has issued an ultimatum to accept its latest contract offer, The Globe and Mail's Brent Jang reports.

Less than four weeks into a 180-day mediation process, Air Canada surprised the union, ACPA’s negotiating committee said in a memo to its 3,000 members.

Air Canada is already facing a strike threat for next week by the International Association of Machinists and Aerospace Workers.

Construction gains Residential real estate construction continues apace in Canada.

Housing starts increased in February to an annual pace of 201,100, Canada Mortgage and Housing Corp. said today. That's up from January's 198,100, and was driven largely by construction of multiple units, such as condominiums, townhomes and semi-detached units, in Quebec and British Columbia.

"Multiple housing starts in Quebec had fallen nearly 50 per cent in January, so February’s rise can be seen as a return to a more normal rate of construction," said CMHC's deputy chief economist Mathieu Laberge.

Starts on multiples in Ontario, where Toronto's condo market is a concern, fell.

"Housing starts now appear to be in a sideways market (since last summer), and we expect that starts could soften to an average 190,000 or so this year, as the impetus from low rates begins to wane, and as housing-related pent-up demand is gradually exhausted," said Emanuella Enenajor of CIBC World Markets.

Fender files documents Here's one cool initial public offering: Fender Musical Instruments Corp.

Fender, whose guitars were used by some of the world's biggest rock stars, has filed regulatory documents to go public on Nasdaq under the symbol FNDR. The IPO is slated to raise $200-million (U.S.).

"We believe that the Fender brand in particular is closely associated with the birth of rock ‘n roll and has a strong legacy in music and in popular culture," said the company, whose roots date back to Leo Fender in 1946.

"The authenticity and quality of our brands are highlighted by the numerous, well-known current and historical musicians and groups that are often associated with our products. While a number of our brands, including Fender, have broad appeal, other brands in our portfolio offer products with distinct sounds or styles targeted at musicians in particular genres, including rock ‘n roll, country, jazz, heavy metal, blues and world music."

Among those who have strummed Fenders were Jimi Hendrix, Eric Clapton and David Gilmour. No doubt some new bands, too, but I'm stuck in a certain era.

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