By Bruce Stewart, Columnist, Troy Media
TORONTO, ON – When Angela Merkel, the German Chancellor, made her visit to Ottawa last week, almost the first words out of her mouth were a demand that Canada help fund the bailout of the Eurozone.
Prime Minister Harper said no. Rightly so, too.
The next 12 months will be filled with demands that Canada throw its money at problems in other countries. It’s a path we should resist.
Citibank published a research report this week indicating which countries would be able to hold onto their AAA credit ratings in the next year. It’s a very short list, and we head it. There were no prospects that the United States could hold its AA+ as is, much less return to AAA status. Nor Japan (AA-) or most of Europe (only Germany and the Scandinavian countries have solid prospects). Britain (still AAA despite its horrendous debt and deficit issues) was expected to cling to its rating as well, although frankly that seems self-serving on the bank’s part.
Lower credit ratings means higher interest rates on debt. The first wave of this crisis, back in 2008, saw most countries – including Canada – run deficits tostimulate their economies, even while trying to impose austerity programs at the same time. We, and they, also dropped central bank interest rates to rock bottom levels. We, and they, also shifted our debt to have far more short-term debt and less long-term.
But as the Spanish recently discovered, the central bank can say interest rates are whatever they like, but when it comes to placing the bonds to roll over prior debt, the market decides what it thinks they’re worth. For the Spaniards, with an official European Central Bank rate of 0.75 per cent, the market said pay more than 7 per cent or “no sale”.
But before Canadians get too smug about a AAA rating, remember that’s just for the federal government. Two provinces – Alberta and British Columbia – hold AAA ratings as well but Ontario’s was downgraded in April to AA-, and both Ontario and Québec are on credit watch by the ratings agencies. (The rest are Saskatchewan at AA+, Manitoba at AA, New Brunswick at AA-, Nova Scotia at A+ and Newfoundland & Labrador and PEI at A.)
Lower ratings mean higher interest rates paid by the province. That diverts money from health care, education, welfare and other programs to keep paying for past deficit spending.
Cities face a different challenge. Canada’s real estate markets have been hit with multiple changes: mortgage lending rules have tightened, many markets have become unaffordable and so prices are falling but a number of markets still have a lot of construction about to complete. That inventory will continue to put downward pressure on prices. This means that property taxes tied to assessments are going to fall.
Our governments will be hard pressed to throw money at the next economic slowdown. It’s already starting globally. Half of Europe’s economies are shrinking. America’s never really clawed its way back from recession and, in this election year, it gets to choose between tax increases or the world refusing to fund its deficits any longer. Japan’s trade deficit is getting much larger. China has slowed dramatically. Brazil is now in stimulus mode as it hass moved into recession.
More bad news: Belize, in Central America, recently defaulted on its interest payments to bondholders and Greece needed yet another tranche of money from the rest of Europe. Major long-standing companies in shipping and transportation are going out of business, or withdrawing from markets, as costs rise and usage slows.
Canadians must take charge of their own finances. Find ways to augment your income if you can. That could be some part-time work, selling items at markets, or moving investments to gain income streams (the dividends paid on the banks’ preferred shares might serve for that). The more sources you have, the less worry.
Pay down as much debt as you can. Find ways – like buying a little for the pantry each month – to deal with price increases in the future. Bank of Canada Governor Mark Carney has repeatedly said interest rates need to rise. Markets are saying it, too. Lock in as much debt at low rates as you can – and pay it down.
Cash will soon be king. Make sure you have some. Until then, hope Harper keeps saying “no” when the world wants to draw us into their bailouts.
Troy Media columnist Bruce A Stewart is a Toronto-based management consultant. http://www.troymedia.com