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  • Auto industry cuts European jobs
  • From today’s Globe and Mail

Insolvencies on rise

More Canadians are going bust as they grapple with higher interest rates.

But while more will probably collapse under the weights of their debts, the situation won’t get anywhere near as bad as it did during the recession and financial crisis of a decade ago, Bank of Montreal stressed as it parsed the latest numbers.

And there’s something of a reprieve in the Bank of Canada’s signal that it’s going to go slowly as it raises rates given the economic uncertainty of the day. Not only that, many of us are adjusting as rates rise from the lows of the crisis era and then the oil shock.

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Certainly, though, this is a sign that higher rates will force Canadians to cut back, pressuring consumer spending.

“While mortgage rate relief is expected, Canadian households are still feeling the pinch from climbing borrowing costs at a time when debt ratios remain near record highs,” BMO economic analyst Priscilla Thiagamoorthy said in a report.

At this point, she added in an interview, it’s just a “slight uptick” in the numbers, though the situation bears watching.

According to the Office of the Superintendent of Bankruptcy Canada, consumer insolvencies climbed more than 5 per cent in November from a year earlier. That followed an even bigger rise in October.

“While bankruptcy data can be volatile, taking the annual percentage change of the three-month rolling tally shows a moderate upward shift,” Ms. Thiagamoorthy said.

“This, along with recent declines in residential investment and car sales, suggests that households – the biggest segment of the economy – are under some pressure,” she added.

Insolvencies come in two forms, one being outright bankruptcy and the other via proposals to settle debts by changing the credit terms.

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And there’s something of a story in that breakdown: The number of proposals rose 12.1 per cent in November from a year earlier, to 6,670, while bankruptcies declined 3.6 per cent to 4,650.

Both rose in October, but proposals at a far faster pace.

Those people may not be among the most tapped out because they’re the ones taking the initiative to settle their debts, Ms. Thiagamoorthy said, and “we could see more coming out of the woodwork.”

Remember, too, she added, that while rates have climbed, gasoline prices have dipped, so there’s an offsetting impact for family finances.

Derek Holt, head of Capital Markets Economics at Bank of Nova Scotia, noted that bankruptcies are still near record lows.

“Proposals have increased and have been doing so for many years but the whole purpose to a proposal is to avoid bankruptcy or less dire stresses,” he said.

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In fact, Mr. Holt added, what’s happening marks “one of the great relative strengths” of the Canadian system against the U.S. program, for example.

“Proposals are worked out through a willingness to restructure payments and debt without necessarily forcing the client into bankruptcy and seizing uncertain net asset values minus related costs,” Mr. Holt said.

“One extreme example of the difference is that strategic defaults generally don’t exist in Canada; walking away with impunity is generally not an option, versus working out one’s obligations in a mutually satisfactory way,” he added.

“This is not a new phenomenon. It has been rising for years. It can be an attractive way of working out challenges on both sides of the borrower-lender relationship. For instance, lowered payments can be accompanied by longer amortizations or more efficient debt pooling to the mutual advantage of borrower and lender, especially relative to the alternative U.S. system that proved to be utterly incapable of flexibly addressing challenges.”

Canadians are famous for their swollen debts, though credit growth is slowing amid new mortgage-qualification rules and higher rates.

But as Bank of Canada governor Stephen Poloz noted Wednesday, many Canadians are juggling it.

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Canada’s housing market, he told reporters, is taking its sweet time stabilizing, possibly because of provincial measures aimed at cooling inflated prices or the “combined effects” of higher rates and new mortgage rules.

“Homebuyers are adapting by seeking smaller, lower-priced homes; home sellers are offering lower prices; and home builders are adapting to growing demand for smaller homes,” Mr. Poloz said.

“These adjustments are taking time, so we need to continue to monitor the situation carefully,” he added.

“But we must keep in mind that the markets in Toronto and Vancouver were exhibiting a degree of froth, and it is always difficult to judge where the market will stabilize once froth has been removed.”

His comments came after the central bank held its benchmark overnight rate steady at 1.75 per cent, citing the troubles in the oil market. Having said that, the Bank of Canada still pointed to rates rising again, just not yet.

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Europe loses auto jobs

The easy times are over for the European auto makers, columnist Eric Reguly writes.

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Both Ford Motor Co. and Jaguar Land Rover announced thousands of job cuts in Europe today, our European correspondent reports, as the companies restructure across the continent.

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