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2-point rate hike would spell trouble for 2 million: TD

These are stories Report on Business is following Thursday, Jan. 19, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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TD on debt Toronto-Dominion Bank's chief economist is raising alarm bells over high levels of personal debt, but the view from Craig Alexander isn't doom and gloom.

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The widely watched debt-to-income ratio, which stands at a record and was flagged by the Bank of Canada this week, is an imperfect measure of stressed finances, Mr. Alexander says in a report, though he does expect it could rise and he still sees problems when interest rates inevitably climb from their crisis-era lows.

"Given the fact that Canadians are increasingly viewing the prevailing level of interest rates as normal, there is an extremely high probability that it will be very unsettling to Canadians when interest rates do rise, even if they do so gradually," he said.

"For the majority of households, it will be similar to when gasoline prices unexpectedly increase materially - finances generally remain intact but there is less money in your wallet to make other purchase, which can lead to significantly lower spending growth by consumers that make up roughly 60 per cent of the economy."

Much has been made of the fact that the debt-to-income measure is nearing the 160-per-cent mark that got the Americans into such trouble. That doesn't suggest that Canada follows suit, though. What matters more, Mr. Alexander said, is the quality of the assets in question and the ability of families to meet their commitments.

"The rising trend in the ratio does, however, flag the fact that Canadians are becoming more leveraged and are more vulnerable to an economic shock than they were heading into the 2008-2009 recession," he said.

"Personal finances are also more exposed to swings in real estate valuations, as the bulk of debt accumulated in recent years has been mortgage related. To be clear, there is good reason to believe that Canada has avoided the imprudent borrowing and lending decisions in the United States, but this does not rule out the possibility - the likelihood in fact - that Canada will experience a housing correction when interest rates do eventually return to more normal levels."

TD estimates that a rise in interest rates of two percentage points would mean trouble for about 10 per cent of Canadian households with debt, in terms of meeting their commitments. That, Mr. Alexander said, is because more than 40 per cent of income after tax would be earmarked for debt servicing.

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"This is not the bulk of Canadians and it does not suggest a U.S.-style problem, but it does represent close to 2 million households," he said.

Ottawa, he added, might wish to look at further action, though Finance Minister Jim Flaherty has ruled out more intervention in the housing market at this point.

Google sinks after earnings Quarterly results flooded in after North American markets closed from several major companies, including Google Inc. , Microsoft Corp. , IBM Corp. and Intel Corp. . Google shares fell sharply in after-hours trade. Here's a partial rundown:

In the money? The New York Times reports that today is bonus day at Goldman Sachs Group Inc. and hopes aren't running particularly high.

While the Wall Street powerhouse hasn't slapped a ceiling on the payments, Kevin Roose reports, it still hasn't been the best of times in the industry, and many employees think their bonuses will be down, particularly after the bank's fourth-quarter results yesterday.

Goldman profit fell more than 55 per cent in the quarter to $1.01-billion (U.S.) or $1.84 a share, from $2.39-billion or $3.79 a year earlier. Notably, revenue from investment banking tumbled almost 45 per cent.

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Goldman said yesterday its compensation and benefits came to $12.23-billion last year, down 21 per cent from 2010. It also gave a chunk to charity.

As Mr. Roose writes, Goldman will give deferred stock to many of its employees, pegged to today's closing price. That means they're hoping for a dip in share price, which would in turn mean more stock.

Question of shippers for Keystone President Barack Obama's rejection of Keystone XL isn't seen as the death of the proposed pipeline to the Gulf Coast, but analysts do believe some shippers may defect.

As The Globe and Mail's Shawn McCarthy and Nathan VanderKlippe report, the Obama administration said yesterday it won't allow the project, which would carry 830,000 barrels of oil sands bitum a day, to go ahead in its current form, but that TransCanada Corp. can reapply.

The company is working on an alternate route, which would skirt an environmentally sensitive area in Nebraska, and plans to submit a new application.

"Plans are already under way on a number of fronts to largely maintain the construction schedule of the project," said chief executive officer Russ Girling. "We will reapply for a presidential permit and expect a new application would be processed in an expedited manner to allow for an in-service date of late 2014."

Producers have stuck by TransCanada. While the project is still seen as going ahead, the question now is "when and how many contracts flee," said analyst Chad Friess of UBS Securities Canada.

Mr. Friess does not expect a mass exodus, but he does see some erosion before a completion date in the second half of 2014.

"The 830,000 barrel-a-day XL project carries significant contractual commitments ... critical to the economic viability of the pipeline," Mr. Friess said.

"The majority of these shippers were content with the revised approval timing of Q1 '13 but we do expect some migration of commitments towards Enbridge's Gulf Coast alternative, though not enough to condemn the project," he said in a research report.

"The key question will be whether a refile will add further delays to the [Department of State's]original guidance. Ultimately, the results of this fall's presidential election may now play a significant role in the approval timing."

TransCanada said in mid-December that more shippers had signed off, bringing to more than 1.1 million barrels a day for the full Keystone pipeline system, which includes an existing route.

Today, Mr. Girling said at a conference that shippers are still behind TransCanada.

"At the current time all of our shippers are indicating, its still very important, it's the furthest thing along, 'So get back in there and get the permitting done'," he said.

Kodak moment Eastman Kodak Co. filed for bankruptcy protection in the United States, giving the 130-year-old photography icon time to overhaul its business and make the most of its patents.

Kodak said in a statement that it had arranged debtor-in-possession financing from Citigroup Inc. to the tune of $950-million (U.S.), and that the move will allow the company to focus on its "most valuable" units. It also plans to "monetize" intellectual properties not deemed strategic.

"Chapter 11 gives us the best opportunities to maximize the value in two critical parts of our technology portfolio: our digital capture patents, which are essential for a wide range of mobile and other consumer electronic devices that capture digital images and have generated over $3-billion of licensing revenues since 2003; and our breakthrough printing and deposition technologies, which give Kodak a competitive advantage in our growing digital businesses," said chief executive officer Antonio Perez.

U.S. jobless claims fall Bit by bit, the jobs crisis in the United States is easing.

Initial claims for jobless benefits declined sharply last week, by 50,000 to the lowest since the spring of 2008, according to data today from the Labor Department.

These numbers are traditionally volatile, particularly at the beginning of the year, but the four-week moving average also dipped, though by 3,500, to 379,000.

It's important to note that that's below 400,000, seen as a key level for continued job creation.

In Canada, the number of people collecting regulator jobless benefits was little changed in November, at 539,000, Statistics Canada said.

Factory shipments climb Shipments from Canada's factories climbed 2 per cent in November as the machinery sector scored its highest level of sales on record.

The overall gain marked the fourth increase in five months, Statistics Canada said today.

Fourteen of 21 industries measured chalked up increases, but that represented about 80 per cent of the sector, the federal agency said.

The machinery industry was a standout, marking a 13.4-per-cent sales increase.

"The growth was mostly concentrated in the mining and oil and gas field machinery manufacturing industry, where a number of companies completed large projects for delivery to both domestic and international customers," Statistics Canada said.

Inventory levels climbed again, for the 14th month in a row, by 0.4 per cent, unfilled orders rose 1.2 per cent, and the inventory-to-sales ratio dipped to 1.31.

"Going forward, while the recent increase in demand for U.S. autos could continue to support factory activity here, the completion of the resource-related machinery sales in November suggests the pace of factory shipments could slow in the months ahead," said Emanuella Enenajor of CIBC World Markets.

Bombardier on luxury list Heremes, Chanel, Louis Vuitton, Versace, Prada and ... Bombardier.

The World Luxury Association today ranks the globe's 100 most valuable brands where bling is concerned after what it calls the "Luxury Oscar Awards" held in Beijing this month.

Bombardier Inc. holds second spot in the aircraft category, just behind Gulfstream, but ahead of rival Embraer.

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About the Author
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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