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Canada still strong, Fitch says In this world of downgrades, Canada still looks strong

The Fitch Ratings agency said today that the Canadian economy looks to be heading for slower-than-expected growth and at risk of shocks from the euro zone, while jobs are being lost, after a strong 2010 boosted by higher commodity prices and government stimulus measures.

"Still, the Canadian government's demonstrated ability to put forth a credible long-term fiscal consolidation plan provides critical support for the country's triple-A rating," Fitch said in a statement. "The government's commitment to eliminate the federal budget deficit by the middle of this decade even in the context of weaker growth puts Canada ahead of other peers rated triple-A."

It also noted that Finance Minister Jim Flaherty has said he's ready to step in with more stimulus "in a pragmatic way" should conditions sour even more. Indeed, Mr. Flaherty said this again as recently as yesterday.

Canada has built-in buffers that will help defend the triple-A credit rating, the agency said.

"The growth outlook for Canada remains tightly connected with that of the U.S., which accounts for approximately three-quarters of Canada's exports," Fitch said.

"Nevertheless, 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."

Standard & Poor's reaffirmed Canada's triple-A rating in the summer.

S&P's coup de grâce Standard & Poor's has upped the ante markedly for this week's EU summit with its sweeping warning on the credit ratings of 15 euro zone countries.

The pressure was already on given the proposal by Germany's Angela Merkel and France's Nicolas Sarkozy for treaty changes that would penalize members of the 17-nation monetary union, and possibly the entire EU, for breaching the 3-per-cent deficit-to-GDP mark.

S&P said it will make its decision after the summit. While several of the 15 countries are already in the basket-case category, the credit watch does threaten the triple-A ratings of six of the stronger nations. And it appears likely that at least France will be downgraded, observers said today.

"This puts a lot of pressure on the summit to do the right thing," Carl Weinberg, the chief economist at High Frequency Economics, said in a report titled "Coup de grâce - We are not the only skeptical ones."

While the markets appear to be taking the move in stride, S&P has put a knife to the throat of those six countries, and, arguably, put the German chancellor and French president in a much better position to get what they want. S&P did not mince words when it cited the dithering politicians of the euro zone who have failed to stem the crisis after two years.

But, noted CMC Markets analyst Michael Hewson, it also creates more problems in certain of the nations.

"The downgrade threat also makes it much more politically difficult for countries that have a large euro sceptic element like Finland who are also more fiscally conservative," Mr. Hewson said.

"Given they have been more fiscally conservative they probably have more to lose and rather begs the question, why ratify a treaty change that could well precipitate a ratings downgrade? It also seems likely to raise the political pressure in Germany with respect to the costs of closer integration. This it would seem is the price of admission towards closer fiscal integration, the question now being asked around Europe in the triple-A' countries is whether it's a price worth paying."

Fifteen countries were put on watch yesterday. Greece was excluded because its current ratings signal "there is a relatively high near-term probability of default" anyway. And, Cyprus was already on watch.

Here's what S&P said were behind the decision:

It cited several factors:

  • Tightening credit conditions across the region.
  • "Markedly higher risk premiums" on an increasing number of countries, including some in the triple-A club.
  • "Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among euro zone members."
  • High government and personal debt levels.
  • The mounting risk of recession next year: "Currently, we expect output to decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40 per cent probability of a fall in output for the euro zone as a whole."

"Today's CreditWatch placements are prompted by our belief that systemic stresses in the euro zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole," S&P said.

Carney stands pat The Bank of Canada held its benchmark rate steady at 1 per cent, warning of the mounting troubles in Europe.

Global uncertainty has heightened and Europe's sovereign debt crisis has deepened since the central bank's last policy announcement, it said, noting that "the recession in Europe is now expected to be more pronounced than the bank had anticipated in October."

While prospects in the United States have brightened somewhat, a pullback by consumers and the fallout from Europe are expected to hold back the U.S. recovery, the Bank of Canada said. And the outlook for Canada is dimming.

"On balance, recent economic indicators in Canada suggest that growth in the second half of this year is slightly stronger than the bank projected in October," the central bank said.

"Household expenditures have more momentum than had been expected and business investment remains solid. Going forward, the weaker external outlook is expected to dampen GDP growth in Canada through financial, confidence and trade channels. The economy also continues to face competitiveness challenges, including the persistent strength of the Canadian dollar."

Analysts believe the Bank of Canada under Governor Mark Carney will not be changing rates for some time yet.

"Today's announcement is the first after the Bank released its downgraded economic forecast in October's [monetary policy report] and strikes a slightly more dovish tone in line with the deepening euro zone crisis," said economist Leslie Preston of Toronto-Dominion Bank.

"It remains consistent with our call for the Bank of Canada to leave interest rates unchanged until the first quarter of 2013 - implying an unchanged overnight rate for over two years, an unprecedented situation which underscores the fragility of the economic recovery."

Polish firm to acquire Quadra Polish copper producer KGHM Polska Miedz SA has struck a deal to buy Canada's Quadra FNX Mining Ltd. for $3-billion.

KGHM, the world's ninth-largest producer of copper and third-largest producer of silver, is offering $15 a share for Quadra's copper-focussed assets in North and South America, including the promising Sierra Gorda copper project in Chile and mines in Sudbury, Ont., The Globe and Mail's Brenda Bouw reports.

If approved, the acquisition would be one of the largest in the copper sector since Barrick Gold Corp. bought Equinox Minerals Ltd. for $7.3-billion last spring. It's also the latest in a growing list of foreign miners picking off Canadian-based companies across several resources in the race for what's left of the world's diminishing resources.

BMO profit climbs Bank of Montreal posted a 21-per-cent gain in fourth-quarter profit today, continuing what has been a more profitable quarter for Canada's banks, though it missed analysts forecasts.

BMO profit climbed in the quarter to $897-million or $1.35 a share basic ($1.34 diluted), from $739-million or $1.24 a share during the same quarter last year, The Globe and Mail's Grant Robertson reports. Revenue rose 20 per cent to $3.88-billion.

"We are well positioned as a top-10 North American bank, with a clear and visible brand, a significantly expanded retail and wealth management footprint and a well-developed wholesale presence," said chief executive officer Bill Downe.

Precision Drilling boosts budget Canada's Precision Drilling Corp. boosted its planned 2012 spending today while disclosing it expects to take a fourth-quarter hit of $100-million to $120-million to decommission almost 50 rigs.

Precision plans to spend $1.14-billion next year, including $738-million on expansion, $232-million for maintenance and infrastructure, and $173-million elsewhere.

The expansion will see seven new drilling rigs.

"In 2012 we plan to continue to deploy capital toward rig new builds and upgrades and make investments in infrastructure, including expanding our field support presence with new facilities and logistics support investments in Texas, North Dakota and Alberta to aid Precision in continuing to reduce our operating costs, improve our up-time and customer service capabilities," said chief executive officer Kevin Neveu.

More analysts cut RIM Kris Thompson has a particularly bleak outlook for Research In Motion Ltd. , so much so that the National Bank Financial analyst slashed his price target on the BlackBerry maker's shares to just $10 (U.S.) today.

Many analysts have taken a dimmer view of RIM since it issued a profit warning on Friday and disclosed plans to take a huge hit related to the weak launch of its PlayBook tablet.

Indeed, RBC Dominion Securities analyst Mike Abramsky also cut his target, but to $20 from $23. That's still well above Mr. Thompson's new target, which was cut from his previous $16.

Mr. Thompson does not mince words in his analysis today, citing the troubles that continue to dog the Waterloo, Ont.-based company.

"Many investors are expecting RIM's new BBX operating system to resurrect the company next year," he said in a research report.

"While we are cheering for this outcome, we have little confidence that any management team could save RIM in its current form. Turning around a $20-billion company with 17,000 global employees in a fast moving, hyper-competitive market is a massive task."

As The Globe and Mail's Iain Marlow reported, RIM on Friday not only cut its earnings forecast for the year, but also warned it expects to ship fewer BlackBerry devices in the fourth quarter than in the third. That fourth quarter, of course, takes in the key holiday selling season.

RIM said Friday it is committed to its PlayBook in this market dominated by the iPad from Apple Inc. , and plans an enhanced version. The company also said that "based on the positive response to the promotions that are under way in select markets, RIM believes this strategy will accelerate adoption of its QNX-based platform by consumers and enterprises, as well as help to drive the development of a vibrant application ecosystem in advance of its next generation BlackBerry smartphones."

Here's how Mr. Thompson sees RIM's woes:

  • Troubling market share erosion: "We believe RIM's subscriber base will peak in [fiscal]2013 before entering a decay phase from churn as post-paid contracts expire and pre-paid phones become archaic compared with competing devices."
  • The value of patents may not be as high as believed: "We still can't rule out the possibility that RIM's intellectual assets are valuable. But the M&A frenzy appears past; a significant premium to book value may no longer be warranted."
  • Little in the way of a takeover: "Catching a falling machete is risky. This would be a brave transaction. Takeover candidates are limited and a significant premium is unlikely, in our view."
  • Earnings outlook: Mr. Thompson now estimates earnings per share of $1.74 in 2013, down 38 per cent and based on a reduced market share this year.

"We expect [fiscal]2013 to be very challenging for RIM as BB7 handsets become artifacts and the new BBX-based smartphones will face intense scrutiny in the marketplace," he said. "We expect RIM's hardship to deepen before improving, if BBX can lead the company out of its current funk."

To be sure, Mr. Thompson is glummer than most, though there's no question, as Mr. Abramsky put it, that the outlook has darkened after Friday's developments.

Mr. Abramsky said a "recovery in valuation" will depend on the competitiveness of the coming BBX devices, better marketing, improved governance and restoring investor confidence.

Business ticker

In Economy Lab Studies reject the idea among some that generous social systems in Europe are 'welfare magnets' for poor foreigners, Naomi Powell writes.

In International Business The airline industry will tell you it generates at most 3 per cent of global carbon dioxide emissions, making it only a small part of the global warming problem. True, but air travel for business, holidays and weekend breaks is shooting up through the clouds, Eric Reguly reports.

In Globe Careers When fierce macroeconomic crosswinds are blowing, even good communication, employer-employee trust, shared sacrifice and smart management cannot guarantee a soft landing, Andrew Hill of The Financial Times writes.

In Personal Finance Yields on blue chips have never been more attractive, compared to interest rates, a money manager says.

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