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The euro logo sits in front of the European Central Bank (Martin Oeser/AFP/Getty Images)
The euro logo sits in front of the European Central Bank (Martin Oeser/AFP/Getty Images)

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Why there are growing fears of housing bubble in Canada Add to ...

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Greece wildfire spreads

The wildfire that is Greece's debt crisis spread to other parts of Europe and through financial markets today, driving down stocks, bonds and some currencies. Europe's situation was already volatile when Standard & Poor's added more pressure by downgrading Greece to junk status and cutting Portugal's credit rating. Credit default swaps related to Greece, Portugal and Spain all reached new highs, pointing to even greater troubles for the continent's weak economies.

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The crisis routed financial markets. European stocks and the euro fell, as did North American markets and the Canadian dollar.

"The situation in the Greek financial market has descended into chaos," Charles Stanley analyst Jeremy Batstone-Carr told The Wall Street Journal. "The European decision-making process has only exacerbated an already disastrous situation."

Last Friday, Greece sought to calm the markets by asking the EU and the International Monetary Fund for a bailout that could run to about €45-billion. But even that isn't working. Indeed, Goldman Sachs Group Inc. said in a research note today that the EU and IMF may have to lend the Greek government €150-billion over three years. And Citigroup Inc.'s chief economist warned Greece will probably default on its debts, or bondholders will take a massive haircut, unless it gets very easy terms on the support package.

"Ten-year yields in the other weaker members (Portugal, Spain and Ireland) have all moved higher today ... highlighting the rising contagion risk," said Scotia Capital currency strategist Camilla Sutton. "Should the market push financing costs any higher, the governments and corporates of the weaker members will also suffer under the weight of higher interest rates. At the same time, safe haven flows are moving into the stronger European sovereigns, pushing yields in Germany, France, Switzerland, etc., lower."

Markets are unclear on the timing of a bailout, and worry it won't come in time. They also fear that events in Germany, which is heading into regional elections and where the public opposes a bailout, may not bode well.

"Investors are looking for the next weak link in the euro zone," Simon Ballard, credit analyst in London with RBC Dominion Securities, told The Globe and Mail's European correspondent Eric Reguly.

Read

S&P rating cut hits Greece, Portugal

Canadian dollar sinks on Greek woes

David Berman's Market Blog on the rout

Audio

Eric Reguly on why the party's over for Greece



Housing bubble in making?

Concerns over a potential housing bubble are growing. Edward Jones analysts warned in a report today that, while the real estate market escaped the meltdowns in countries such as the United States, "today's conditions in Canada share some characteristics of those countries prior to their downturns, leading us to take a cautious stance on housing investments."

Kate Warne and Craig Fehr listed three factors that point to a bubble: Prices well above historical averages, easy credit and lax government policy. While the federal government recently tightened up mortgage rules, the analysts noted that "we think the first two conditions characterize the current Canadian housing market."

Canada's real estate market dipped in the recession, but rebounded quickly and sharply.

David Rosenberg, the chief economist at Gluskin Sheff + Associates, also recently warned of "the looming real estate-related slowdown."

He noted that Canada did not see as dramatic a bubble in housing and credit as that in the United States. "But maybe Canada experienced its bubble in the past year instead," he said. "After all, homeownership rates, mortgage debt ratios and many home price valuation metrics in Canada have reached the same stretched levels the U.S. did back in 2005 and 2006."

Mr. Rosenberg went further, saying his statistical work shows that about half of the 7-per-cent annualized growth in nominal gross domestic product from the depths of the recession is due to the direct and indirect impact of the housing boom.

"And when we apply the price deflators to the various sectors of GDP, we actually find that every penny of economic activity, in real terms since this recovery began, has occurred thanks to the housing sector," he wrote. "In other words, if not for housing real GDP would have stagnated since [the second quarter of 2009]instead of rebounding at a 3-per-cent annualized pace."

The Bank of Canada also warned last week that it expects investment in the real estate market to cool considerably through this year and into 2011, though it was also referring to money pumped into renovations and there was no warning of a bubble.

Testifying to the Commons finance committee this afternoon, Bank of Canada Governor Mark Carney reiterated that "we see a marked weakening in housing over the course of our projection (into 2012), starting from the second quarter of this year and over the balance."

Mr. Rosenberg said that, while the central bank would never say so publicly, he believes it, too, is concerned. "Like the bank, I am totally blown away by Canada's V-shaped recovery and the housing bubble's role in shaping the bounceback," he said. "I wonder aloud whether or not the bank now wished it had begun the process of taking the punchbowl away from the housing market six or even nine months ago." Read the story

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