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Will Flaherty move again to tame consumer debt surge?

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Will Flaherty act on credit? Observers are speculating that Finance Minister Jim Flaherty will move again in his next budget to stem the growth of consumer debt.

Policy makers, from the Bank of Canada governor to the superintendent of bankruptcy, have been urging Canadian households to curb their appetite for cheap money, warning they may not be able to handle the cost when interest rates rise again.

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Mr. Flaherty has already introduced tougher mortgage requirements, and Nomura Securities believes he may act a second time.

The latest statistics show levels of household debt at a stunning 148 per cent of personal disposable income, fuelled largely by growth in mortgages but also other debt. Loans tied to home equity have also surged.

"The situation leads us to think that the government is likely to intervene to slow the pace of household credit growth," said Nomura's Charles St-Arnaud.

The Bank of Canada could, of course, raise interest rates to help enforce a diet, but this is not likely and, Mr. St-Arnaud noted, would have "some unintended negative impacts on the Canadian economy." Those include boosting financing costs for businesses and, likely, driving the Canadian dollar even higher.

"It is these risks to the economy that have prompted the Bank of Canada to raise the issue in a number of speeches," Mr. St-Arnaud said in a research note.

"By increasing the awareness of the situation, the Bank of Canada hopes that households and financial institutions will change their behaviour, reducing both the demand for and supply of credit. For the former, this means living within their means and budgeting for higher interest rates in the near future. For the latter, this means imposing tighter credit conditions for consumer loans, credit cards, lines of credit and mortgages."

Mr. St-Arnaud cited three options:

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Tougher oversight of banks. The Office of the Superintendent of Financial Institutions has already told banks they will need to do more monitoring, and stress testing. "The increased scrutiny will likely force banks to be more cautious and tighten credit conditions for households."

Tougher mortgage rules by Canada Mortgage and Housing Corp. "The most likely way of tightening the requirement would be to reduce the maximum amortization period to 30 years. We doubt that the 90 per cent loan-to-value will be reduced, as high house prices have make it more difficult for households to save enough for such a large cash down-payment."

Tougher rules for home-equity loans. "Generally, the minimum requirement for a [home equity line of credit] is to hold a minimum of 20 per cent equity in the home and the value of the line of credit is a maximum of 80 per cent of the equity in the home. These requirements are not imposed by the government. However, the government could impose further requirements if necessary. A likely approach would be to ensure that borrowers can still make their payments in the event the line of credit is maxed out and/or use rates on a five-year fixed mortgage, instead of a low variable rate. Alternatively, the share of equity that can be accessed could also be lowered."

"The choice of the approach will likely depend on how serious the government thinks the situation is. We think that tighter requirements for [home equity lines of credit] will be the preferred approach, as that would tackle the fastest growing component of household debt," he added, though tougher CMHC requirements are also a valid option.

Really, folks? The C.D. Howe Institute recommends the Bank of Canada raise interest rates next week, citing an improving economic backdrop in the United States and overseas, and ebbing concerns over a backslide or deflation.

Seriously, people? It seems a tad early for another volley from central bank chief Mark Carney, who has raised his benchmark overnight rate three times since the slump ended, bringing it to a still-low 1 per cent.

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Mr. Carney should instead watch global developments unfold. Inflation is at his target of 2 per cent, though the core index, which strips out volatile items and guides monetary policy, is at 1.4 per cent, down from earlier.

And while Canada has regained jobs lost to the recession, the unemployment rate is still high at 7.6 per cent, while the strong Canadian dollar remains a threat.

Housing: A bit better than average It was a slightly better than average December for the Canadian resale housing market, the Canadian Real Estate Assocaition says, although prices and inventory remained little changed from the month before.

The national resale price was $344,551, up 2 per cent from the same month last year and little changed from November, Globe and Mail Real Estate writer Steve Ladurantaye reports. Sales were down 14 per cent from a year ago, when a new record for December's sales was set.

China boosts reserve requirements The People's Bank of China ramped up its inflation fight today with another increase in reserve requirements for its banks. It's the fourth time in less than three month the central bank has done this.

The reserve requirement ratio, or RRR, for China's major banks will soon be 19.5 per cent - an average 18.5 per cent when all lenders are factored in - with today's half a percentage point hike.

"The apparent preference for using the RRR to tighten policy in part reflects fears that interest rate increases would attract more hot money," said Mark Williams, senior China economist at Capital Economics in London, though he added he doesn't share that view.

Inflation on some radar screens Inflation is back on some radar screens.

In the euro zone, the annual inflation rate jumped from 1.9 per cent in November to 2.2 per cent in December, moving above the European Central Bank's target for the first time in about two years, Globe and Mail European correspondent Eric Reguly reports today. Germany's inflation rate climbed to 1.9 per cent from 1.6 per cent. And in Britain, inflation is on its way toward 4 per cent.

This comes a day after ECB chief Jean-Claude Trichet warned he act decisively to combat inflationary pressures.

Separately, in India today, the government reported that its wholesale price index climbed to 8.43 per cent in December from 7.48 per cent a month earlier.

State of the U.S. economy Retail sales in the United States came in below expectations today, but it was still a good showing. Sales rose 0.6 per cent last month, the U.S. Commerce Department said. When you exclude what are seen as the volatile items of cars and gasoline, sales were up 0.4 per cent.

December's showing marked the sixth consecutive increase, which highlights some spunk among U.S. consumers.

"A number of big-ticket purchases made strong gains in the month, which is a good anecdotal measure of consumer confidence," said deputy chief economist Beata Caranci of Toronto-Dominion Bank. "... A decisive turnaround in consumer spending looks to have taken hold in August and continues to move forward."

Separately, the U.S. Labor Department reported, consumer prices rose 0.5 per cent in December from November, while the core rate inched up just 0.1 per cent. The annual overall rate rose to 1.5 per cent, but this was driven by gas prices.

"Core inflation is expected to remain near current low levels this year, encouraging the Fed to complete its Treasury-purchase program through mid-year and to keep rates steady until early next year," said senior economist Sal Guatieri of BMO Nesbitt Burns.

What do the reports signal?

"Together, December's U.S. retail sales and consumer price reports suggest that real consumption growth accelerated to 3.8 per cent annualized in the fourth quarter, from 2.4 per cent in the third," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

"If our calculations are correct, that would be the strongest quarterly growth in consumption for four years. We are still skeptical that this faster pace of growth can be sustained beyond the first quarter, however, even after allowing for the new reduction in payroll taxes. The first signs of a slowdown are already beginning to emerge."

A fresh reading on industrial production in the United States showed a gain of 0.8 per cent in December. That brought fourth-quarter annualized growth to 2.3 per cent, which, as senior economist Jennifer Lee of BMO Nesbitt Burns put it, isn't spectacular but does mark the sixth gain in a row.

"More promising news on the economic front and adds to Fed Chairman Bernanke's view that the economy is becoming more self-sustaining," she said.

JPMorgan profit jumps JPMorgan Chase & Co. today kicked off earnings among U.S. banks with a hefty gain in profit and fewer bad loan losses.

JPMorgan earned $4.8-billion (U.S.) or $1.12 a share, compared to $3.3-billion or 74 cents a year earlier.

Chief executive officer Jamie Dimon said challenges remain but there are signs of "stability" and growth coming back to global markets and the economy.

Targeting Canada Analysts believe the entry into Canada by Target Corp. will resound in many, including heightened competition on the Canadian retail scene.

"We believe Target's large-scale purchase provides it with national scale and relevancy in the Canadian market," UBS Securities Canada analyst Vishal Shreedhar said today, a day after the U.S. retailer's Zellers deal.

"We believe Target will assume high-quality locations - 83 per cent of the Canadian population is within a 10-minute drive to a Zellers site."

Over the long term, Target's entry into Canada could have "an important incremental impact" on the retail scene, resulting in greater competition, he said. Shorter term, though, competition could "soften" amid the transition.

"Furthermore, we believe that it will take time for Target to adapt its merchandising strategy and brad to the Canadian market," he added. "We point to Lowe's which we believe is still trying to adapt to the Canadian market despite being in Canada since 2008. Retailing is very competitive and we do not think Target is assured similar productivity levels as those achieved in the U.S."

Wal-Mart Canada, The Bay and Sears Canada are the "most vulnerable" to Target's entry, he said.

A look at Iceland's meltdown Iceland turned to the United States for help during its 2008 meltdown, looking for a loan "preferably" in the amount of $1-billion (U.S.), newly released WikiLeaks documents show.

While it didn't get the loan, instead taking an International Monetary Fund bailout of more than $2-billion, it did spark some angst among the Americans that Iceland would turn to the Russians for help, the cables suggest.

In a letter addressed "Dear Tim," referring to Timothy Geithner when he was president of the Federal Reserve Bank of New York, Iceland's central bank chief, David Oddsson, runs through the embattled country's efforts up to that point in October, including a standby deal with the IMF and discussions on Iceland's request for a currency swap arrangement with the Fed.

(When you're looking for $1-billion, you might try "Dear Mr. Geithner.")

Mr. Oddsson did eventually get to the point, in the second-last paragraph of the letter: "I hereby request participation from the Federal Reserve Bank in the financing of the economic program. Swap liens are short term in nature, but we need a financing commitment over a longer term horizon. Because of this, the Central Bank ideally needs a loan from the Federal Reserve of a medium term maturity, preferably in an amount of 1 billion USD. We are also seeking financing from other sources.

Mr. Oddsson added he looked forward to "prompt and favourable consideration." We're not sure about the first, but he didn't get the latter.

In a cable to Washington, U.S. ambassador Carol van Voorst pointed out that Iceland's foreign minister was aware of the letter but hadn't seen it. The acting permanent secretary told the ambassador, according to the cable, that the ministry was concerned that such a request got to the right people, and the U.S. could expect that request through "proper channels."

"Comment: The Government of Iceland is obviously struggling with problems of co-ordination and turf in dealing with the financial crisis," according to the cable. "Away for the first couple of weeks of the turmoil (due to brain surgery), the Foreign Minister is attempting to reassert her normal role in foreign affairs. The Central Bank, however, is guarding its perceived prerogatives closely - and, judging from the events of the last few weeks, unwisely. End Comment."

The U.S. embassy was concerned that Iceland, whose economy and banking system were collapsing, would go to Moscow for a loan instead, which, among other things, could have given Russia some sway in Iceland's offshore energy developments. There's also a former U.S. air base there.

"We have long-term national interests in the North Atlantic that a negative response would jeopardize," the ambassador wrote.

Boyd Erman's Morning Meeting Coupon website Groupon is skyrocketing in valuation, recently raising $590-million and now eyeing a spring initial public offering that would give the company a valuation topping $15-billion (U.S.), Streetwise columnist Boyd Erman reports today.

In Your Business today

It's estimated that only one quarter of entrepreneurs have "business wills" that cover their company's operations, and as a result, many owners end up leaving family members and employees in the lurch.

Friday case study: In October, 2007 B.C.-based Harbour Air began to add a carbon offset surcharge to its flights to counterbalance the emissions of its passenger services. In January, 2008, it made all of its corporate operations carbon neutral, paying for offsets directly out of company revenue. How did Harbour Air become the first airline in North America to achieve carbon neutraility while continuing to grow its business?

There are legitimate reasons to launch a spinoff of a successful business, but it's not without its challenges and risks.

In Personal Finance today

For many Canadians, the biggest tax hit they will ever face is if they pass away with a big RIF or RSP balance. Financial adviser Ted Rechtshaffen explains how to avoid this situation.

A money-saving idea for every day of the week, from Home Cents blogger Chaya Cooperberg.

If you have trust in your adviser, discretionary accounts can make everyone's lives easier, writes columnist Preet Banerjee.

From today's Report on Business

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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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