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S&P paints picture of region in crisis, slashes euro ratings

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S&P downgrades several euro countries Standard & Poor's took its axe to the euro zone today, downgrading ratings on nine countries, including France, and warning European leaders haven't done enough.

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"In our view, the policy initiatives taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone," the ratings agency said.

S&P cut the long-term ratings on Italy, Portugal, Spain and Cyprus by two notches, and those of France, Austria, Malta, Slovakia and Slovenia by one notch. The ratings on Germany, Finland, Belgium, Estonia, Ireland, Luxembourg and the Netherlands were affirmed. France and Austria were stripped of their triple-As.

"The outlooks on the long-term ratings on Austria, Belgium, Cyprus, Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, and Spain are negative, indicating that we believe that there is at least a one-in-three chance that the rating will be lowered in 2012 or 2013," S&P added.

It painted a bleak picture of a region in crisis, hit by tighter credit conditions, soft economies and infighting.

"Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone," the agency said.

"In our view, these stresses include: (1) tightening credit conditions, (2) an increase in risk premiums for a widening group of euro zone issuers, (3) a simultaneous attempt to delever by governments and households, (4) weakening economic growth prospects, and (5) an open and prolonged dispute among European policy makers over the proper approach to address challenges.

"The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements from policy makers, lead us to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the euro zone's financial problems. In our opinion, the political agreement does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those euro zone sovereigns subjected to heightened market pressures."

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France is key because a downgrade to its rating can affect borrowing costs for the euro zone's bailout fund, which is also on a creditwatch.

Until today, there was actually a turn in sentiment this week where Europe is concerned, largely on successful bond auctions and comments from European Central Bank chief Mario Draghi that suggested some stability was beginning to return to the region.

Will Greece force bondholders into deal? There's speculation today that Greece could force bondholders into what's billed as a "voluntary" agreement to give the embattled government a break.

Reports differed today as Greece met with creditors in Athens again. One report said Greece will introduce legislation to force a deal, but another rejected that. Any such move would probably trigger a default, which many observers expect anyway. A Greece official said the talks were inconclusive and the two sides will get together again next week.

According to The Wall Street Journal, key issues remain as Athens races for a resolution before Greece is scheduled to pay out holders of €14.5-billion in paper that matures in March.

Creditors were expected to take a haircut of 50 per cent under an earlier sweeping proposal meant to ease the debt crisis in the euro zone.

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The Financial Times reported that the talks broke down, which raises the likelihood of a Greek default.

"Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach," said a statement from the men negotiating for the creditors.

"We very much hope, however, that Greece, with the support of the euro area, will be in a position to re-engage constructively with the private sector with a view to finalising a mutually acceptable agreement on a voluntary debt exchange."

The Fed, and Canada's housing market Sherry Cooper raises the question today of whether the Federal Reserve's 2006 failure to grasp the housing crisis has "eerily similar portent for Canada."

The chief economist of BMO Nesbitt Burns suggests not, but warns a crash is a sudden thing.

"Corrections in housing do occur and they can occur suddenly, so while this is not a red alert, we are not flashing green, either," Ms. Cooper said in a research report.

Her comments followed the release of transcripts on Thursday from Fed meetings in 2006, which showed members of the central bank's policy-making panel were clueless as to the storm that would hit, despite warnings.

Canada's housing market has been remarkably resilient, though it is expected to slow.

"Some are now wondering if Canadian policy makers and bankers might not be too sanguine about the housing strength in Canada, specifically in Toronto and Vancouver," Ms. Cooper said.

"While the Canadian situation is far different from the U.S. of 2006, the continued surge in condo construction and overall home prices to levels that are not consistent with the growth in domestic income is certainly raising questions about its sustainability and the fallout if it were to unwind."

There are many, many differences, as Ms. Cooper points out today. Subprime lending is negligible in Canada, mortgage rules have already been tightened, and the Bank of Canada has been on alert for some time, warning borrowers to get a handle on their debts. Banks, too, have warned about the housing market.

"Certainly, low interest rates make housing more affordable, boosting sales and prices - but the elevated supply of condominiums in Toronto (and, earlier, in Vancouver) is raising issues of overbuilding and future excess supply if interest rates were to rise," Ms. Cooper said.

"As well, foreign capital inflow has supported the Toronto and Vancouver housing markets for years. That factor has apparently been on a significant uptrend in Toronto in recent years. The outlook for that flow is uncertain, although arguably, Toronto will remain an attractive safe haven for foreign money. But how stable that money is remains a question."

Toronto-Dominion Bank economist Diana Petramala also warned on the housing market, and the vulnerability of consumers.

"The key drivers of economic growth in the fourth quarter were consumer spending and housing activity, not a desirable outcome for an economy facing risks with high household indebtedness and an overheated housing market," she said.

Canadians have been spending and borrowing, largely in the area of mortgage credit.

"If indebtedness continues to grow at its current pace, the household debt-to-income ratio will reach 160 per cent by 2013 - the level hit when U.S. households got into trouble," she said.

"Meanwhile, strength in new home construction has been driven by multi-unit starts (condos) particularly in major urban centres like Toronto and Vancouver. At 200,200 annualized units in December, Canadian housing starts are running hotter than what would be considered consistent with the underlying pace of household formation. As a result, there is now a large overhang of completed and unoccupied multi-units. In light of the lofty number of condos under construction, the imbalance is only likely to worsen over the next few years."

Canada to end results ban Social media has caught up with the Canadian government.

Canada has decided to end a ban, enacted in 1938, on the early transmission of election results when polls remain open in various parts of the country, and in different time zones, The Globe and Mail's Gloria Galloway reports.

The government, said Tim Uppal, the minister of state for democratic reform, is "committed to bringing Canadian elections into the 21st Century."

It's about time, as Mr. Uppal said via Twitter today, a fitting way to announce the decision.

"The ban, enacted in 1938, does not make sense with widespread use of social media and modern communications technology," he said.

"Canadians should have freedom to communicate about election results without fear of heavy penalty."

Mr. Uppal is introducing legislation to end the "dated ban."

Trade balance rebounds Canada's trade balance rebounded to a surplus of $1.1-billion in November as exports, largely oil, climbed 3.2 per cent and imports slipped 0.8 per cent.

It's worth noting, too, that reports from Canada and the United States today tell different stories.

North of the border, today's numbers from Statistics Canada mark a sharp turnaround from October's deficit of $487-million.

Canadian exports climbed to more than $40-billion on broad-based gains, the federal agency said. Prices rose 1.7 per cent, largely in the energy sector, and volumes climbed 1.6 per cent, primarily from the auto industry.

Imports fell to $39-billion, with both volumes and prices down.

Exports to the United States increased 1.9 per cent, widening the surplus with Canada's biggest trading partner, while those to other countries jumped by 6.7 per cent. The latter was largely due to stronger exports to Europe, despite its debt troubles and projections that it's headed back into recession.

"We had expected a reading in the black for November, and the details confirm that a stronger pace of activity in the U.S. was a key driver of the month's rebounding trade," said Emanuella Enenajor of CIBC World Markets.

Over all, the energy sector led the gains as exports rose 6.4 per cent. Oil exports were up for the fourth month in a row, hitting a record $6.4-billion.

"Looking ahead, Canadian trade stands to benefit from an expanding U.S. economy, although the lagged impacts of past Canadian dollar appreciation will limit export gains," said senior economist Krishen Rangasamy of National Bank Financial.

The U.S. Commerce Department also reported trade data today, which showed America's deficit widened by 10.4 per cent. On that side of the border, higher oil prices pushed up imports, while exports to Europe were weak.

"The widening in the U.S. trade deficit in November, to a 10-month high of $47.8-billion from $43.3-billion in October, is perhaps the first real sign that the crisis in Europe and the more general global slowdown is starting to take its toll on the U.S.," said Paul Dales, senior U.S. economist at Capital Economics in Toronto.

JPMorgan profit slips JPMorgan Chase & Co. kicked off what's expected to be a less-than-stellar fourth quarter for U.S. banks, posted a 23-per-cent drop in profit and missing expectations on revenue as weaker trading hit home.

JPMorgan earned $3.73-billion (U.S.) or 90 cents a share, which was what analysts projected but a decline from $4.83-billion or $1.12 a year earlier. Revenue slipped 17 per cent to $22.2-billion.

"The firm's returns on tangible common equity1 for the fourth quarter of 2011 and the full year 2011 were 11 per cent and 15 per cent, respectively," said chief executive officer Jamie Dimon. "We believe these returns were reasonable given the environment, although the return for the fourth quarter was modestly disappointing."

However, Mr. Dimon added that the economy is continuing to recovery, and "we are gratified to see signs of improvement in loan demand and credit quality."

Tensions mount As High Frequency Economics puts it today, "temperatures are rising in the oil markets" as Iran threatens to block the Strait of Hormuz.

Chief economist Carl Weinberg notes that it's not likely Iran will actually carry through, because that would hurt its own exports. Having said that, even talk of problems "can cause a big speculative jump in oil prices."

To recap, Iran has made the threat, and the United States stands ready to use force to keep oil moving through the Strait of Hormuz, a key point for Gulf producers and a route for about 20 per cent of the world's crude. The EU won't decide on an Iranian oil embargo for at least six months.

As Mr. Weinberg notes in a report titled "The next thing to worry about," 18 per cent of U.S. supplies and 13.8 per cent of euro zone supplies come from the region. "So this is a big deal and a volatile situation."

A significant jump in oil prices would be ill-timed as the euro zone heads back into recession, and the United States struggles to climb back.

"If we see military adventurism by Iran and a 'shock' to oil supplies, we can guess that oil prices will rise sharply, although it is hard to know how far," Mr. Weinberg said.

"The 2008 high of $145 per barrel is as good a stalking horse as any. That would be $35 per barrel, or 32 per cent more than today's price."

The euro zone countries import some 10 million barrels a day, and every increase of $10 means a hike of $100-million (U.S.) a day, or $36.5-billion a year. Converted, that's €28.5-billion, or 0.3 per cent of gross domestic product.

"Let us say that given a fragile economy - which was already contracting at the end of last year and may contract by a lot in 2012 under the weight of massive credit crunch, cascading bank failures and huge fiscal bailout costs - any further decrement to GDP growth will hurt more than in more prosperous times. So we are hoping that reason will prevail and Iran will not provoke an oil-price-spiking episode in the Strait."

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From today's Report on Business

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