Canadians vulnerable if economy worsens
December 12, 2008
Julian Beltrame
The Canadian Press
OTTAWA (Dec 12, 2008)
A significant number of Canadians are at risk of defaulting on mortgages and other loans if the global financial crisis deteriorates and triggers a deeper recession, the Bank of Canada warns.
In a sobering assessment of the financial crisis, the central bank concludes that significant risks remain for both the global economy and Canada if credit conditions don't begin to improve.
"With household balance sheets under pressure from weak equity markets, softening house prices, slowing income growth and record-high debt-to-income ratios, a severe economic downturn could result in a substantial increase in default rates on household debt," the bank said in its December financial systems review released yesterday.
The Bank of Canada says the number of "vulnerable households" -- the 3 per cent with a debt-to-income ratio above 40 per cent -- could double by the end of next year under this pessimistic scenario.
That would mean tens of thousands of households could face crushing debt as Canadians lose jobs and family incomes drop to the point where they can't pay their bills.
The central bank notes this is a worst-case scenario. The "most likely outcome" is for global markets and credit conditions in Canada to gradually improve, it states.
This is partly because central banks and governments around the world have come up with extraordinary measures such as cash injections, asset swaps and credit guarantees to backstop financial institutions to pump additional billions of dollars of credit into the economy.
But the Canadian central bank's top officials also warn that there is "a significant risk of mutually reinforcing weakness in the financial sector and in the real economy."
That's the kind of negative feedback that felled the U.S. economy, noted Douglas Porter, deputy chief economist with BMO Capital Markets. "Given the fact we're looking at the recession in the teeth, some of the worst-case scenarios have to be studied a little more closely," he said."It looks like we're going to get as close to the bank's worst-case scenario than anyone would have imagined possible as recently as three months ago."
After resisting the call for months, the Bank of Canada declared the economy in recession Wednesday when it slashed its trendsetting interest rate to the lowest level in 50 years at 1.5 per cent.
Most economists are forecasting growth at or below zero for 2009 with job losses of more than 100,000 and an unemployment rate above 7 per cent.
Pressure is mounting on Ottawa to shock the economy into recovery with a big stimulus spending plan in its Jan. 27 budget.
Yesterday, Porter urged Ottawa to spend as much as $16 billion next year to arrest the economy's slide into recession. He said such a package should include spending on infrastructure as well as a one-time bonus for seniors on public pensions, temporary cuts to payroll taxes and the GST, and vouchers that would give Canadians government cheques on the condition they spend rather than save.
As well, Porter says Ottawa should consider a one-time financial transfer to the provinces, which could put the money more directly to use.
http://www.thespec.com/News/Business/article/480930
By the sounds of this article it doesn't really matter how much the mortgage is.
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