Risk of Euro-shock ‘very high’

The Bank of Canada continues to warn that the high level of household debt and overvalued real estate in this country have left the economy vulnerable if a financial shock erupts in Europe.

OTTAWA — The Bank of Canada continues to warn that the high level of household debt and overvalued real estate in this country have left the economy vulnerable if a financial shock erupts in Europe.

“Markets in Canada have been relatively stable . . . nevertheless, a further significant deterioration in global financial conditions could have a considerable impact in Canada through trade, financial and confidence channels,” the bank said Thursday its semi-annual financial systems review.

In fact, the bank says the spillover effects on Canada’s financial institutions, such as banks, “would be substantial.”

While the report does not attempt to place odds on the chance of a Europe-centred shock, it judges the risks as “very high,” or the top level in its scale.

The dire warning — not altogether unexpected from the central bank given renewed turbulence in Europe, including a possibility that Greece will exit the euro currency zone after Sunday’s elections — gives some urgency to the G20 summit of leaders in Mexico next week, where Europe will be the main topic.

In Ottawa on Thursday, Finance Minister Jim Flaherty said non-European countries in the G20 need to keep up the pressure on the Europeans to put up sufficient money to “overwhelm” the problem.

In reference to yet another idea being floated — guarantee of bank deposits in Europe — he said the manner of the solution was up to the eurozone.

“It is important that we and the United States as well, and the other non-European G20 countries, continue to exert pressure on the eurozone countries to deal with this matter because it can have unfortunate consequences for the global economy,” he said.

The Bank of Canada report leaves little doubt if the problem is not contained in Europe, Canada would suffer.

In fact, the central bank suggests households here may be in worse position for another shock now than they were in 2008, when the collapse of a prominent U.S. investment banker sparked a cash crunch and recession.

Since that time, the report said, consumers have taken on significant amounts of new debt and real estate prices are also at record highs.

In its financial system review identifying risks to the economy, the bank noted certain segments of the housing market that have a persistent oversupply — such as condos in Toronto — face a higher risk of a price correction.

Using a hypothetical stress test, the bank says a three per cent increase in unemployment — about the same as occurred in the recent recession — would almost triple the proportion of indebted households that would go into arrears.

The current rate is currently about half a per cent and could rise 1.3 per cent under that scenario.

A shock would also cut into net worth of Canadians. The bank points out that 40 per cent of household worth is tied to the value of their real estate holdings, compared to only 34 per cent a decade ago.

The Bank of Canada was careful to point out it wasn’t predicting a global crisis like the one in 2008, but suggested a failure in Europe could not be contained to that region.

The central bank concluded that the risks of a European financial meltdown that could ripple around the world have returned to the elevated levels of last December.

“The key risks to financial stability are highly interdependent and mutually reinforcing,” it states.

“If the sovereign debt crisis in Europe continues to intensify, it would further weaken global economic growth and prompt a general retrenchment from risk. In turn the weaker global outlook would fuel sovereign fiscal strains and impair the credit quality of loan portfolios.

“Together, these factors would increase the probability of an adverse shock to the income of wealth of Canadian households.”

As well, the diminished prospects for economic growth likely lead to a continuation of rock-bottom interest rates in Canada, which would further erode the positions of life insurance companies, pension plans and boost household borrowing.

Economists call the mechanism a “negative feedback-loop,” and what the central bank is describing is almost identical to what occurred after 2008, when the world was plunged into the worst recession since the Great Depression.

In Canada, the slump was mitigated by a sound banking system and strong government fiscal positions that allowed Ottawa and the provinces to inject about $60 billion of stimulus into the economy.

Still, about 430,000 jobs were lost and Canada’s gross domestic product fell by more than three per cent. Some sectors of the economy, in particular manufacturing, have still to recover fully.

The bank’s shock test shows that in some ways Canadians are in a more precarious position today than they were in 2008.

At the time, households in arrears also doubled, but from less than 0.3 per cent to about 0.6 per cent. Now they would almost triple to 1.3 per cent and from a higher starting point, given the record levels of debt.

Just Posted

PHOTOS: Day 1 of the 2019 Canada Winter Games in Red Deer

Here’s a look at what happened during the first day of the… Continue reading

Calgarian takes gold in women’s speedskating

Brooklyn McDougall competed in long track 1,500-metre speedskating event

Speedskaters pick up Alberta’s first Winter Games medals

Calgary’s Brooklyn McDougall wins gold and Lethbridge’s Kaleb Muller wins silver

Red Deer gymnast hopes to flip his way to a personal best

Zach Blakely is looking forward to the ‘community’ aspect of Games

Youngest Alberta athlete at Red Deer’s Canada Winter Games focuses on the win

Emily Liu, 10, beats much larger table tennis players

VIDEO: Community ‘comes together’ at opening ceremonies

The nation will focus its eyes on Red Deer for the next… Continue reading

South African activists try to protect endangered pangolins

JOHANNESBURG — As World Pangolin Day is marked around the globe, Saturday,… Continue reading

Fourteen ‘dream’ homes ordered evacuated as sinkholes open in Sechelt, B.C.

Greg and Gerry Latham spent Friday morning scrambling to pack up family… Continue reading

Former B.C. premier Gordon Campbell accused of sexual assault: British newspaper

LONDON — A British newspaper says police in London are investigating an… Continue reading

Graham: U.S. should be stronger on Canadians detained in China

MUNICH — U.S. Sen. Lindsey Graham said Friday the response by the… Continue reading

Conservative leaders to attend pro-pipeline rally in Saskatchewan

By Stephanie Taylor THE CANADIAN PRESS MOOSOMIN, Sask. — Federal Tory leader… Continue reading

Games athletes making themselves at home at RDC

Red Deer College’s campus will be home for the athletes during the 2019 Canada Winter Games

Alix resident captures beams of light near Lacombe

Lacombe, Blackfalds, Red Deer photos have since gone viral around the world

Welcome message from the mayor

On behalf of Red Deer city council, the City of Red Deer… Continue reading

Most Read