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Spain: It’s beginning to look a lot like ... Greece

These are stories Report on Business is following Friday, June 8, 2012.

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It's beginning to look a lot like ...
This game the Europeans play is wearing thin.

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The situation in Spain sounds awfully familiar. They don't need a bailout. They don't want a bailout. They haven't asked for a bailout.

It's Greek to me.

Reuters today quotes sources as saying they expect Spain to ask its European neighbours this weekend to help rescue its foundering banking system, and that the finance ministers of the euro zone would discuss the matter in a conference call tomorrow. Other news outlets are reporting the same thing.

The European Commission could confirm no such meeting, and noted that Spain had not requested a bailout.

Prime Minister Mariano Rajoy said he had spoken to others in the group, but he's waiting for reports from consultants on just what the country's banks require before deciding on a course of action. The first report is expected later this month.

"Having learned a lesson from Ireland's foray into the bailout program, the consistent message from the EU and in particular Prime Minster Rajoy is that we will see no action until an exact figure in is known regarding the potential bailout of Spain's banks," said Brenda Kelly, senior strategist at CMC Markets.

"News that the IMF will release a report early next week stating how much they expect will be needed is also giving food for thought. No doubt, the usual repetitive sound bites from Europe will continue up till that point."

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As many, including Canada, have said, the Europeans need to get on with it and decide on a concrete plan to fix the euro zone, the 17-member group that shares the currency. A bailout would mark the fourth rescue of euro zone nations after Greece, Ireland and Portugal, headed up by the European Union, the European Central Bank and the International Monetary Fund.

"While markets would view some sort of aid for Spanish banks as welcome in the short term, it seems unlikely that this will be coming from the Spanish  government - and any involvement by the ECB or the IMF may be seen by some as a dangerous precedent to set," said David Jones, chief market strategist at IG Index in London. "With all of these unknowns, it is not surprising that there is little appetite this morning to start stocking up on risk assets ahead of the weekend."

Any rescue would, of course, mark a dangerous new phase in the euro crisis, as Spain would be the biggest economy to fail so far. Already, the focus has shifted to Spain, indicating the failure of Europe's leaders to halt the spreading virus.

"A 'bailout' of Spanish banks poses a lot more questions than it answers," said Lauren Rosborough of Société Générale.

"Specifically that this crisis began with Greece and now has spread to Spain. Will the focus move on again? The market believes that European officials have yet to put in place contingencies that will stem contagion and stress on other European countries."

Labour market flat
Canada's jobs market is taking a breather after two months of solid gains.

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The economy churned out 7,700 jobs in May, and the unemployment rate held steady at 7.3 per cent, The Globe and Mail's Tavia Grant reports.

The pace of job creation is well down from the 58,000 positions created in April, and the stubborn level of unemployment leaves the Canadian government will work on its hands in an era of austerity.

There were troubling signs in today's report from Statistics Canada, although it was seen to still illustrate a healthy market overall. The private sector, which is going to be the driver in the labour market given government cutbacks, cut jobs to the tune of 22 per cent from April. Ironically, public sector jobs rose by almost 7 per cent. And the ranks of the self-employed swelled by 23 per cent.

"A sizeable gain in manufacturing was the bright spot, but there was a pull back in construction and a drop overall in services," said chief economist Avery Shenfeld of CIBC World Markets. "Construction may be reflecting the earlier start to the building season, resulting in less than normal hiring now."

Indeed, manufacturing bounced back, by 36,400 jobs, marking the sixth consecutive month of gains for the sector.

"Suffice it to say that after two months of massive (and frankly unbelievable) job gains, some cooling is far from a shock," deputy chief economist Douglas Porter said of the overall jobs report.

"Perhaps the bigger story here is that Canada held on to the hefty job increases in the spring and even added to the totals despite the gathering uncertainty on the global economy. The specific pieces of good news in today's report were the strength in factory payrolls and the solid gains in wages. While this result will not move the dial on Bank of Canada expectations, it does suggest that the overall labour market remains relatively healthy."

The pay gains are indeed worth watching.


"Importantly, year-over-year wages of full-time permanent workers advanced to 2.87 per cent from 2.37 per cent the prior month, representing the strongest gain since 2009," said fixed income strategist Ian Pollick of RBC Dominion Securities.

"Recall, the Bank of Canada follows this metric very closely as a proxy for underlying inflationary pressures. However, to the degree that modest wage gains characterized 2011, the fact that annual advances are now challenging CPI growth rates should be seen as a positive to the consumer, potentially extending the reliance on households to fuel the expansion. Again, the type of dynamic we feel will elicit a policy response from the bank later this year."

There's also the longer view to keep in mind.

"Looking beyond the volatility in the data, the Canadian economy has added an average of 28,000 new jobs over the last six months - not bad for an economy that is growing at an average pace 2 per cent," said Diana Petramala of Toronto-Dominion Bank. "In our view, economic growth at that pace is more consistent with employment gains in the range of 15,000 to 20,000 per month. "

Canada sinks to deficit
Note that we're talking about a different month here - April - but exports slipped 1.2 per cent in the month, leading to a trade deficit of $367-million. However, the drop in exports was the result of lower prices.

That compared to a surplus of $152-million in March, according to Statistics Canada today.

Exports fell because of a 1.9-per-cent dip in prices, largely in the energy sector, while imports climbed for the fifth month in a row, but just by 0.1 per cent.

Exports to the United States, Canada's main trading partner, fell 1.2 per cent, and as did those to other countries.

"April's trade performance in Canada is illustrative of flagging external demand for our exports, while domestic demand continues to hold up," said Leslie Preston of Toronto-Dominion Bank.

"However, domestic demand is starting to moderate, as illustrated by a decidedly flat trend in imports. So, this release isn't really positive on either side of the trade equation. Fortunately, much of the negative shift in the trade balance is due to a continued mild deterioration in Canada's terms of trade. Also, real exports are up two months in a row, which is better news for GDP growth."


New CRTC chief
Ottawa insider and veteran public servant Jean-Pierre Blais has been tapped to chair Canada's telecom and broadcast regulator, The Globe and Mail's Steven Chase reports.

Mr. Blais's record suggests he would be a relatively cautious hand at the helm of the Canadian Radio-television and Telecommunications Commission, telecom industry sources say.

Unlike former chair Konrad von Finckenstein, telecom insiders have predicted Mr. Blais would be relatively compliant with Conservative government policy leanings and endeavour to keep the CRTC out of the headlines.

Signs of trouble in condo market?
New construction starts in Canada fell markedly last month, notably where condominiums are concerned.

Housing starts fell 13 per cent to an annualized pace of 211,400 in May, according to Canada Mortgage and Housing Corp. today, something of a disappointment given hefty gains in April.

A decline in multiple units, such as condos, was the prime culprit, slipping almost 21 per cent, though single starts were down by more than 4 per cent.

Starts in Quebec plunged 36 per cent, and those in Ontario fell 18 per cent.

"It was always going to be difficult for builders to maintain the April levels of construction," said senior economist Krishen Rangasamy of National Bank Financial. "The soft economic growth and sky high prices may be offsetting the benefits of low interest rates. In any case, the recent drop in residential building permits points to soft housing starts ahead."

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