In a speech to the Canadian Club in Toronto this past week Canada’s Finance Minister Jim Flaherty urged European leaders to find a solution to their debt crisis as it has spread beyond the eurozone and into credit markets worldwide creating a “dire and pressing problem” that threatens the rest of the world with possible “social unrest and instability”. Words: 870
So say John Greenwood (www.financialalpost.com) and staff of http://finance.sympatico.ca in edited and amalgamated excerpts from their respective articles*.
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The amalgamated version of their respective articles goes on to say:
In his speech Mr. Flaherty warned of “consequences” for those countries so affected if European leaders did not resolve the issues facing them quickly – consequences such as massive debt burdens that would be carried for generations and, in some cases, “social unrest and instability”.
European nations are currently grappling with a sovereign debt crisis that is threatening the euro and European Union itself. Several nations have already received bailout funds from the International Monetary Fund and other bodies [Portugal, Iceland, Ireland and Greece] with Belgium being the latest country to be downgraded by Standard and Poors given their growing liklihood of recession and the country’s exposure to financial sector losses. Furthermore, even larger economies [such as Italy, France and Germany] moving to the centre of the crisis increasing the impact on the global economy.
For example, “the interest on Italian debt is already unsustainably high and if it persists more than 12 months”, according to Craig Alexander, chief economist at Toronto Dominion Bank, “the country will be insolvent and, remarkably, there is not enough money in Europe to bail out Italy were that to occur”. In addition, Germany failed last week to find enough buyers to complete a bond auction signalling a further deterioration of investor confidence in even the safest eurozone country.
“Simply put,” according to John Greenwood, “the euro crisis is quickly becoming a global crisis, and if it goes out of control – if it leads to uncontrolled defaults – it would morph into a banking crisis that would have ‘very significant impact in Canada’ according to Mr. Alexander.”
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Canadian government officials have urged Europe’s policymakers to tackle their growing debt loads with concrete solutions for months, a message which the finance minister continued in his speech Flaherty where he trumpeted the Conservative government’s fiscal record – noting that the government ignored Opposition calls for more spending during previous times of plenty, electing instead to pay down debt giving the Canadian economy a $60-billion shot in the arm when it needed it during the 2008 slowdown – and urged his European counterparts to get their fiscal houses in order.
In his speech, Mr. Flaherty reiterated his confidence in Canadian banks, noting that, for the fourth year in a row, they had been recognized by the World Economic Forum as the world’s soundest. He praised Canada’s economy saying it will have among the strongest growth rate in the Group of 7 and that it currently enjoys the highest credit rating available but stated that, while Canada could weather yet another financial storm in reasonably good shape, “as we have seen, the global economy remains very fragile. Canada is not immune to the problems afflicting economies outside our country. We must not and we will not be complacent.”
According to the finance.sympatico.ca article, “Canada is on track to have a debt-to-GDP ratio of 34.9% this year [which] contrasts [very favourably] with 57.2% for Germany, 72.6% for the United States, 72.9% for the U.K., 81% for France and 100.4% for Italy. The G7 average net debt to GDP is about 80%”, Flaherty noted.
That being said, according to Greenwood’s article “some analysts warn that unlike the previous crisis, we might not fare as well this time around because of the huge growth in household debt, which has left the country vulnerable. Household debt-to-income is sitting at about 150%, according to Statistics Canada, which is the highest in recent memory. Canadian banks have a lot of exposure to Canadian consumers and you have to wonder at what point a bank shareholder problem becomes a problem for the whole country. Because a lot of the mortgages are guaranteed by the CMHC, a crown corporation, the risk ultimately lies with the taxpayer.”
In conclusion, Flaherty said it’s time for governments to take the advice they give to their own citizens: live within your means and save for a rainy day saying, “Households don’t operate like this and neither should countries. When your credit card is maxed out, you don’t go out and get another one and continue to accumulate debt at 18 per cent interest. Instead, you figure out a way to restrain your spending and you increase your payments to reduce your debt.”
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Canadians may wish to consider the underlying trends in inflation and unemployment before making major financial decisions. Recent unemployment data in Canada shows unemployment at 7.3% [vs. 9.0% in the U.S.] and inflation rising to an uncomfortable 3.2% [vs. 3.6% in the U.S. for a Misery Index of 10.5 vs. 13.6 in the U.S.]
Canada’s size, political structure, and culture will enable it to – properly governed – be more resilient to world economic problems than any other developed country. [For one thing] we don’t have the extent of political polarization that… [is currently the case] in Washington…and now exacerbated to new levels in these difficult economic times – and that will, in my view, cause the U.S. to continue down an increasingly rocky economic road. [Below I put forth Canada’s economic advantages and disadvantages.] Words:1026