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Britain 'marginalized' in EU in pact to cover bad debts?

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After the summit Britain now stands alone from the rest of the EU, having refused to sign on to a fiscal pact pushed by Germany and France. But perhaps that's not a bad thing for London.

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Germany's Angela Merkel and France's Nicolas Sarkozy wanted all 27 nations of the EU to agree to a refounded Europe with fiscal discipline and penalties for those that strayed. All of the 17 countries in the euro zone, which share the common currency, and most of those in the wider EU agreed. But Britain's David Cameron could not abide by that at the EU summit in Brussels, and vetoed renegotiating the EU treaty.

There are those who believe Mr. Cameron did the right thing, and protected the country's financial services industry.

"What is sparking a narrower agreement that falls short of the full EU 27 is frankly good old British courage," said Derek Holt and Karen Cordes Woods of Scotia Capital. "He may be a pariah in Brussels today, but good on Prime Minister Cameron for keeping the City out of Europe's ill-advised proposals including a tax on financial services. Europe should have seen U.K. opposition coming months ago on this issue. Europe likes to blame financial markets for its woes, instead of its own profligacy."

Carl Weinberg of High Frequency Economics also questioned the outcome.

"If there is one concrete structural accomplishment of this summit so far, it is that Britain - an economy that pays its own bills and has implemented the most ambitious and coherent austerity plan of any EU nation - has been marginalized in the EU as part of the effort to cover the bad markers left on the table by the PIIGS," Mr. Weinberg said, referring to the name commonly used for Portugal, Ireland, Italy, Greece and Spain.

"This is not a good thing, as far as we can tell."

Ms. Merkel heralded the deal as "a chance for a new beginning." For Mr. Cameron, "my judgement was that what was on offer just wasn't good enough for Britain."

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Mr. Cameron said he wanted to remain in the single market.

Though the overall results of the summit generally buoyed stock markets, and there's no question ground was gained, some observers still aren't convinced, and they don't see the crisis easing.

"This is a great leap sideways," Daniel Gros, director of the Centre for European Policy Studies, told Reuters. "We now have a framework that in 10 years' time could restore a degree of fiscal order to the euro zone. The German view is that this is all that is needed to convince markets to buy Spanish and Italian debt. I have my doubts that it will be enough. I think the tensions continue."

James Marple of Toronto-Dominion Bank also raised doubts, warning that the attempt to boost market confidence with a commitment to the fiscal compact could be a "false hope." It will take too long to ratify treaties, while the focus of the deal is on the future, and does not go to easing the crisis now.

And as others have noted, the original rules were never in question. It's just that they were broken by many countries, including Germany. As well, the push for austerity hinders economic growth, in turn hindering attempts to balance budgets.

For Mr. Marple, the European Central Bank has to step up to the plate and do what its new chief, Mario Draghi, has said he won't, namely support the bonds of the troubled nations. He believes the ECB will ultimately surrender, though.

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"Unless there is a change in attitude by the European Central Bank to reduce the borrowing costs of nations that are solvent but illiquid, the euro zone will experience a dramatic financial crisis and deep recession," the senior TD economist said.

"It appears that the European policy makers require staring into a financial abyss before they will introduce and implement the needed policy actions."

Canada then, Europe now As Scotia Capital puts it, Canada is part of a "dying breed" of countries whose debt is rated triple-A. And there's a lesson in there for Europe.

After a crucial week in the euro zone and the wider EU, some observers believe Standard & Poor's will still carry through on its threat to downgrade 15 of the 17 nations of Europe's monetary union. The results of Friday's summit, coupled with the European Central Bank's refusal to support the debt of the euro zone's troubled governments, make such a downgrade likely, warned RBC's foreign exchange strategy chief, Adam Cole, in London.

Such a move by the ratings agency would shrink the ranks of the triple-A club even more.

Scotia Capital's Mr. Holt and Ms. Woods set out to dispel what they described as the myth that Canada had it easier than does Europe today when it began tackling its fiscal troubles in the 1990s. Indeed, they said in a report Friday, Canada had it tougher.

"The night of the Quebec referendum on Oct. 30, 1995, portrayed Canada at its worst," they said.

"The palpable fear in the markets was keyed off deep intertwined concerns about the country's fiscal, economic and political circumstances. Recall this was a period when a respected U.S. financial daily slammed Canada as a 'banana republic,' yet curiously such references to its home country are absent today."

At the time, they noted, Canadian leaders dismissed market critics as "armchair observers," and the "market-unfriendly backdrop understandably drew the ire of rating agencies through multiple downgrades, as well as bond markets as the country faced the threat of break-up and dissolution of monetary union. Simply put, Canada then was Europe today."

Because of the sacrifices made in the 1990s, Canada is stronger today, part of that dying breed. Not only that, but Canada ranks as the eighth-largest bond market, and fewer still are triple-A among the biggest.

"The country therefore offers an important lesson to nations like the United States and large parts of Europe that are delaying fiscal repair, and punting the problem down the road toward a more ruinous crisis later," they said.

The Scotia Capital economists are not alone when it comes to their interpretation of Canada's standing in global markets.

"Canada continues to benefit from its status as a 'safe haven' destination for international investment," said Mark Chandler, head of Canadian fixed income and currency research at RBC Dominion Securities in Toronto.

"While overall economic and financial performance is threatened by global developments, many of the pillars on the domestic front - notably government finances and the relative strength of the banking sector - continue to provide support for the currency and has allowed the Bank of Canada a period of relative stability in monetary policy (without resorting to non‐traditional measures)."

Just this week, the Fitch Ratings agency said Canada is ahead of its triple-A peers, and that "the macro prudential policies in place, a strong banking system, and the haven status of the Canadian dollar are likely to provide shock-absorbing support for the rating in a scenario where the euro zone crisis worsens and undermines global growth prospects further."

Mr. Holt and Ms. Woods did, though, also issue a warning, noting the buildup in debt to fight the financial crisis and recession.

"Today's large Canadian trade deficits, still sizeable fiscal deficits at federal and some provincial governments, the increase in the general government debt-to-GDP ratio from a trough of 66.5 per cent in 2007 to about 84 per cent today following pre-crisis accelerated spending and the crisis stimulus response, high refinancing amounts on short-dated debt at combined levels of government, record high house prices by any measure, and record high household leverage are sources of concern," Mr. Holt and Ms. Cordes said.

"They are, however, mitigated by a strong financial system, little external debt relative to GDP in contrast to Europe, excellent corporate balance sheets, resource riches, and a strong government financial asset position that translates into a net debt-to-GDP ratio of just over one-third."

Finance Minister Jim Flaherty has missed his original target to balance the budget as the economic landscape changed. He has pledged fiscal prudence nonetheless, though has promised to be flexible.

The good old hockey game What could be more Canadian than hockey and phone companies that Canadians love to hate? Now, they're teaming up.

Canada's BCE Inc. and Rogers Communications Inc. struck a deal Friday to buy control of Maple Leaf Sports and Entertainment from the Ontario Teachers' Pension Plan.

BCE and a BCE trust for pension investments will together own 37.5 per cent of the parent of the Toronto Maple Leafs, the Toronto Raptors, the Toronto FC soccer club and other assets. Rogers will own a similar stake, and Larry Tanenbaum will boost his holdings to 25 per cent.

BCE's cash commitment is $398-million, the trust's is $135-million and the Rogers piece about $533-million.

Analyst Dvai Ghose of Canaccord Genuity described it as a "small bet" for BCE and Rogers, though he questioned whether it's the right one.

"While the deal ensures vital sports content for both parties on a longer-term basis and negates the risk of MLSE going directly to fans through [over-the-top]video streaming, we 1) have never seen a cableco or telco show discernible value from sports franchise ownership and note that Comcast recently sold the Philadelphia 76ers and Cablevision spun out its holding in The New York Knicks, Rangers and MSG; 2) in our view customers want best in class connectivity from their carriers at low prices and with good customer service," Mr. Ghose said.

"We have never heard a consumer tell us that they chase an access provider based on content. We continue to like Telus' strategy of focusing management's time and the company's capital on access and backhaul rather than content."

Maher Yaghi of Desjardins considers the impact of the deal neutral."

"We believe it is strategically positive to control content-producing assets like MLSE," he said in a research note today.

"Controlling this coveted sports content will block it from going to over-the-top TV, hence protecting both the media component (BCE's TSN and Rogers' Sportsnet) and, more importantly, the telco component (TV services). Splitting the cost between these two large enterprises is also positive, as it lowers the risk profile of the acquisition. On the other hand, it is negative that cash flows will not be distributed to investors in the form of dividends or share buybacks. We note that owning content has not historically resulted in synergies for telco providers; moreover, the content itself (i.e. Maple Leaf games) will likely not be exclusive, and other bidders could still acquire it (i.e., CBC)."

National Bank Financial's Adam Shine, in turn, is keen.

"While the net future contribution to each company's bottom line isn't expected to be material and there will be those that believe that such content investments need not be made by cable and telecom companies who should otherwise be focused on their core operations, we'd note that the value of sports franchises is steadily rising, sports programming remains PVR-proof and increasingly valuable across traditional media as well as easily exploited through online and mobile platforms, and Bell and Rogers are well-positioned to successfully leverage MLSE assets across their existing platforms to turn their investments into a rewarding one for their respective shareholders," he said.

There's a side issue here. BCE will now hold stakes in both the Leafs and the Canadiens, which together make for one of the greatest Canadian sports rivalries ever. There are questions as to whether BCE can keep both, though Mr. Shine believes the stake held by the pension fund will "mitigate" the likelihood that BCE would have to dump the Habs.

"That's not to say that the NHL won't possibly ask Bell for some concessions related to the company's stake in the Canadiens, but a divestiture seems unlikely," he said.

If everything goes through as planned, I wonder who chief executive officer George Cope will root for?

What to watch for next week The U.S. central bank holds its last meeting of the year Tuesday, but is expected to stand back from taking any action. Certainly, the Federal Reserve's policy rate will be held at its current low near zero, though markets will be watching for any change in language in the accompanying statement.

The Federal Open Market Committee, the central bank's policy-setting panel, is expected to give a nod to the fact that the indicators of late have been better than expected, and maybe things are looking up. Even the jobless rate has dipped.

"However, the central bank will likely temper these encouraging developments by acknowledging that the unemployment rate remains well above full employment with expected growth over the second half of this year only offering limited progress in closing that gap," said economists Paul Ferley and Tom Porcelli of Royal Bank of Canada.

"As well, developments externally related to the European debt situation could yet jeopardize this recent improvement if higher risk premiums were demanded within financial markets out of heightened concern about a sovereign debt default."

On the corporate side, investors will be watching closely when Research In Motion Ltd. reports third-quarter results.

RIM has seen troubling times of late as analysts slash the price targets on the BlackBerry maker's stock and it suffers setbacks related to the launch of its PlayBook tablet.

RIM has already said it will take a $485-million (U.S.) hit related to the inventory of the PlayBook, in addition to a hit of $50-million related to the BlackBerry blackout. Excluding those two, RIM has said it expects adjusted earnings per share to come in at the "low to mid point" of the $1.20 to $1.40 it had earlier projected.

RBC Dominion Securities analyst Mike Abramsky said he also expects "soft" guidance for the fourth quarter.

Required reading this week Nortel is now dismembered, its brainpower and intellectual property spread around the world. But the damage is still being felt on employment, research activity and the vitality of Canada's tech industry, Barrie McKenna writes.

Air Canada's business model is broken and its employees must be "open to change" for the airline to stay competitive, its top executive warns in a stark internal memo that compares the carrier's challenges to those of American Airlines Inc., Brent Jang reports.

Bonus season is going to be brighter on Bay Street than Wall Street, Streetwise columnist Boyd Erman writes.

Michael Wilson, former federal finance minister, diplomat and Bay Street executive is calling on Corporate Canada to do its part to wipe out the scourge of mental illness in the workplace, Barrie McKenna and Lisa Priest write.

Richard Blackwell reports on the new U.S.-Canada border deal, which is trying to eliminate some regulatory hurdles as part of its broader effort to smooth trade across the border while making both countries more secure.

Six things 1. Senior officials of Transport Canada prepared a briefing book for their minister recommending the department consider asset sales. But this was a document with a twist, according to Bloomberg News, in that it also included some colourful biographies of the staff. Deputy minister Yaprak Baltacioglu was described as "an avid cook and working with her will result in weight gain. The assistant deputy minister of program operations at Infrastructure Canada "enjoys the sound of his own voice and is an above average dancer," and an official in the deputy minister's officer likes working there because of "its proximity to Holt Renfrew." As for the deputy minister's acting executive director, the biography says one of her favourite sports is beach volleyball, and "in her younger days, she was quite the beach babe."

2. "Personal wealth has been destroyed, thousands of people are sinking into poverty, emigration has returned and unemployment is far too high." So said Ireland's Finance Minister Michael Noonan as he boosted taxes by €1-billion, including a two-percentage-point hike to the sales tax, bringing it to a record 23 per cent.

3. Ever told a fib to get some time off the job, something like your mother's ill and you have to look after her? Police in Brookville, Pa., allege a man took out a fake obituary for his mom so he could claim bereavement time, The Associated Press says. The mom in question is reported to have gone to the newspaper proving she was very much alive.

4. Best title for an economic research report, by senior economist Sal Guatieri of BMO Nesbitt Burns: "All I Want For Christmas Is a Brighter 2012 Outlook."

5. A growing number of Italians want the Vatican to pay more tax and share in Europe's debt burden, Agence France Presse reports. More than 70,000 people have signed an online petition, the news agency said, and an Italian government minister is calling for the church to pay up on exempt commercial properties it owns.

6. Five tax officials in the Chinese province of Shanxi have been suspended from work because they either fell asleep or were seen reading papers ... during a video conference aimed at making sure people aren't lazy on the job, Reuters reports.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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