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The world remains smitten with Canada. And its inability or unwillingness to see our flaws could be deepening them.
Two news items Monday highlight investors' continued infatuation with Canada, increasingly visible warts and all, as a safe and happy place to put money in a big, scary planet.
Item one: Statistics Canada reported that foreigners invested a net $14.9-billion in Canadian securities in April, the biggest inflow of foreign money in seven months. In the first four months of the year, foreigners bought nearly $24-billion of Canadian stocks, bonds and t-bills, up nearly 50 per cent from a year earlier. The vast bulk of the buying spree has been in bonds, including nearly $21-billion in corporate debt, whose buyers have been lured by the combination of Canada's stable financial reputation and the extra payout offered over the chronically unpalatable yields of government bonds.
Item two: Debt-rating giant Moody's Investors Service issued a report expressing its continued confidence in its relatively high credit ratings for Ontario and Quebec, despite the two provinces' glaringly high debt levels. Even though both governments have debt loads north of 200 per cent of their total annual revenues, Moody's is satisfied with their large and diverse economies and flexibility with their tax revenues – and noted (tellingly) that the two enjoy ample access to global investor markets that remain confident in their strong and stable debt management.
All this confidence in Canada seems to blithely overlook that this is a massively export-driven economy in a world where export demand is tepid and unreliable. It largely ignores that the Canadian economy is trying to rein in its runaway consumer debts as its housing sector teeters. And by glossing over these problems, it exacerbates them, keeping the Canadian dollar at great heights that both belie the wobbly economic fundamentals and discourage a recovery in exports – something the Bank of Canada believes is essential to Canada's economic turnaround.
Frankly, world, you're suffocating us with love.
Nobel-Prize-winning economist and New York Times columnist Paul Krugman raised some good points about Canada in his blog over the weekend. On the one hand, Canada's financial stability has made it a strong bet in a world recovering from a major banking crisis – a bet that has remained in place even as global financial stability has largely returned to normal. On the other hand, the country's bloated housing market and excessive consumer debt leave it exposed to the risk of a slump-inducing deleveraging that could spell a lengthy period of underperformance – problems that much of the rest of the world has already dealt with, but that could come to Canada very late in the game.
This latter possibility is one the world's investors, in their lust for relatively safe yield, still seem largely unwilling to face. Which isn't a problem if financial stability ultimately trumps the non-systemic risks, and keeps Canada from entering a sustained slump. But if debt and housing corrections turn out to be the more enduring problem, all that money flowing into Canadian bonds may be tossing an anchor to a water-treading economy.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe .
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