Skip to main content

The Globe and Mail

What Ben Bernanke actually said on the 'fiscal cliff'

These are stories Report on Business is following Wednesday, Nov. 14, 2012.

These are stories Report on Business is following Wednesday, Nov. 14, 2012.

Follow Michael Babad and the Globe's top business stories on Twitter.

Story continues below advertisement

What Bernanke said
With all the angst over the 'fiscal cliff,' it's worth noting what Federal Reserve Chairman Ben Bernanke actually said when he used the phrase that now sends shudders through the markets.

The comment came as the U.S. central bank chief was testifying in late February, answering questions for members of the House Financial Services Committee in Washington and referring to the combination of higher taxes and government cuts that would come into effect Jan. 1 in the absence of a deal.

According to a Reuters report at the time, here's the key phrase:

"Achieving long-run sustainability and providing comfort to the public and the markets that deficits will come under control over a period of time - that's very important for confidence and for creating more support for the recovery. But at the same time, I think you also have to protect the recovery in the near term. Under current law, on January 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date."

Mr. Bernanke put some flesh on those bones during the testimony:

"I have expressed concerns about what would happen on January 1st (2013), which would be a major fiscal contraction. I think it would pose a risk to the recovery. What I have advocated is a two-part process, one which is critical that we have a sustainable path going forward in the medium and long term, but that at the same time we pay attention to the recovery and make sure we don't snuff it ... unintentionally."

And this, in more general terms:

Story continues below advertisement

"Once the markets lose confidence in the ability of the government to maintain fiscal sustainability then there are numerous risks. The most extreme case would be a financial crisis or a sharp increase in interest rates analogous to what we see in some European countries. Even absent that extreme result, large deficits and debt over a longer period of time raise interest rates above levels where they normally would be and crowd out investment, and are bad for growth and productivity. They also may involve borrowing from foreign lenders which also is a drain on current U.S. income. So it is important to address this issue."

Strikes hobble Europe
Rage swept Europe today as fresh economic readings promised no respite for the wounded region.

Transportation was crippled in some cities amid strikes in several countries to protest austerity measures meant to bring budget deficits in line, but which at the same time are strangling the economy and driving unemployment to record highs.

Police clashed with protesters across the continent in the mass protest called by the European Trade Union Confederation, according to reports from Reuters.

Amid all this, new signs emerged of a deteriorating economy, notably in the 17-member euro zone, but not confined to the monetary union. Broader readings expected tomorrow probably won't be much better.

"Both Greek and Portuguese GDP numbers for Q3 starkly illustrated the economic malaise that Europe is currently buckling under, with annual GDP for Greece declining 7.2 per cent and Portuguese GDP contracting 3.4 per cent, said senior analyst Michael Hewson of CMC Markets in London.

Story continues below advertisement

"The numbers don't bode well for updated Spain, Italy, France, Germany and euro zone  GDP numbers due to be released tomorrow morning, with the Q4 numbers expected to be equally disappointing."

Another reading today also showed industrial output falling 2.5 per cent in the euro zone in September.

Outside of the euro zone, Bank of England Governor Mervyn King also cut his outlook for economic growth next year.

Just last week, the European Commission unveiled new forecasts of high unemployment and continued broad economic troubles.

The EC projects growth of 0.5 per cent in the European Union in 2013, and no growth for the euro zone, with unemployment at 10.9 per cent in the EU and 11.8 per cent in the currency union.

Of course, that all-encompassing projection masks the differences in individual countries.

The Greek economy, for example, is projected to contract by 4.2 per cent, with unemployment near 15 per cent.

Spain is seen suffering a 1.4-per-cent contraction and a jobless rate near a punishing 27 per cent.

Portugal would see its economy shrink a further 1 per cent, with unemployment at 16.4 per cent.

Italy's economy, too, is projected to still shrink, by 0.5 per cent, while the country struggles under a jobless rate of 11.5 per cent.

And, of course, youth unemployment, a sure catalyst for further unrest, is projected to remain high, as well. Already, about half of Italian and Spanish young people are without work.

Investor seeks to oust Rona board
A major investor is trying to kick out the board at Rona Inc., the Canadian home improvement retailer recently the target of a takeover advance by U.S. suitor Lowe's Cos. Inc.

Invesco Canada, an investment manager that says it controls some 10 per cent of Rona's shares, said in a statement today it wants a shareholder meeting.

"Invesco Canada Ltd., on behalf of the investment funds and client accounts managed by it, announces today its intent to requisition a meeting of shareholders of Rona inc. for the purpose of removing Rona's current directors and electing new directors in their place," the company said.

Most recently, Rona's chief executive officer left the company after a weak earnings report.

Earlier, Lowe's walked away after being rebuffed by the Canadian chain, and by the government in its home province, Quebec, in a bizarre suggestion that the company was a strategic asset that needed to be sheltered.

Starbucks strikes tea deal
Can Starbucks do for tea what it did for coffee?

Starbucks Coffee Co. announced today it has struck a $620-million (U.S.) deal for Teavana Holdings Inc., saying it plans to transform the $40-billion tea market.

"We believe the tea category is ripe for reinvention and rapid growth," said Starbucks chief executive Howard Schultz. "The Teavana acquisition now positions us to disrupt and lead, just as we did with espresso starting three decades ago."

Founded in 1997, Teavana runs some 300 shops in malls. Starbucks said it will add a "high-profile neighbourhood store concept" as well.

Starbucks, which already has its own Tazo tea brand, is offering $15.50 a share, and plans to run Teavana as a subsidiary. It has already locked up some 70 per cent of the stock.

CIBC warns on foreign investment
One of Canada's major banks is taking a firm stand in the heated debate over state-owned firms buying Canadian resource companies, stressing Canada must welcome foreign investment but that such companies must play by our rules lest they face rejection

"As I have often made clear in my meetings with the CEOs of some of China's largest state-owned enterprises: Free markets don't mean a free pass," Jim Prentice of Canadian Imperial Bank of Commerce said today, stressing that Canada must be open to foreign investment.

"And while Canada is most definitely open for business – it is not for sale."

Mr. Prentice isn't just the vice-chair of the bank. He's also Canada's former industry minister, and, thus, had a hand in drafting the current rules.

His comments at a conference in London comes amid controversy over two proposed takeovers, one a bid by Malaysia's Petronas for Progress Energy Resources Corp., the other by China's CNOOC Ltd. for Nexen Inc.

The Canadian government has rejected the Petronas deal, though the Malaysian company says it's still trying to win approval, while the CNOOC proposal is under scrutiny, highlighting the sensitivity surrounding government-owned companies and Canada's rich resources.

At the same time, there are urgent calls for Canadian energy companies to move aggressively into Asian markets as the United States, their only oil and gas market, boosts its own production.

"Coupled with continuing continental pipeline bottlenecks, this represents a significant structural impediment to the industry, the immediate consequence of which is a staggering discount on Canadian oil prices," Mr. Prentice said.

"The situation will get worse before it gets better."

Thus, turning China away would be "patently unwise," particularly when there's no threat to "Canadian values" or environmental and labour regulations.

Mr. Prentice quoted The Economist magazine in saying that "the defining battle of the 21 Century will not be between capitalism and socialism, but between different versions of capitalism," noting that this battle is now playing out in Alberta's oil sands.

It's only logical that the Canadian government would look differently at state-owned companies and "free-market capital," Mr. Prentice said,, adding that some of the criticism aimed at Ottawa is because CNOOC "meticulously respected" the guidelines.

"It is reasonable to expect that the Canadian government's new framework will give careful consideration to how SOEs will be governed in a North American context: Whether they should have public shareholders, independent directors, audit committees and shareholder oppression remedies," Mr. Prentice said.

Foreign investors have, of course, been waiting for some time for the government to spell out its rules.

Ottawa should not fret over the "ethnicity of money," and shouldn't try to force countries such as China to "be like us," Mr. Prentice said.

"The question must instead be whether the capital in question, once lodged in Canada, will adhere to market principles and to North American standards of governance and transparency," he said.

"If so, then it should be welcomed. If not, then the investments should be scrutinized closely and potentially refused."

Grocers hike dividends
Food costs may be up by 1.6 per cent from a year ago, but, hey, shareholders in Canada's major grocery chains are making some of that up through dividend increases.

Loblaw Cos. Ltd., the country's biggest, announced an increase in its quarterly dividend to 22 cents. That's only up a penny, but it's a hike of 4.8 per cent.

Loblaw boosted the payout as it posted a drop in third-quarter profit to $222-million or 79 cents a share from $236-million or 84 cents a year earlier.

Revenue rose to $9.8-billion from $9.7-billion.

Last week, Metro Inc. hiked its dividend by 11.7 per cent to 21.5 cents. Today, it posted an increase in fourth-quarter profit to $145.1-million or $1.46 a share from $84.4-million or 83 cents.

Revenue increased to $2.9-billion from $2.6-million.

Teck boosts dividend
Teck Resources Ltd. is hiking its dividend by 12.5 per cent to 45 cents,  giving back some of the $4-billion-plus in cash it has amassed amid years of prudent spending, The Globe and Mail's Pav Jordan reports.

The move reflects a growing trend among global miners to give more back to shareholders and keep them loyal as many investors shy from an industry better known in recent years for a single-minded focus on growth at any cost.

Just sayin'
Iceland hiked its key lending rate by one-quarter of a percentage point to 6 per cent today, citing "uncertainty about exchange rate developments," among other things.

Iceland will soon be relaxing controls on its krona, which could prompt the currency to drop in value.

All I'll say is that they could have had Canada's loonie, but rejected it.

Business ticker

Report an error Editorial code of conduct Licensing Options
As of December 20, 2017, we have temporarily removed commenting from our articles. We hope to have this resolved by the end of January 2018. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to