Is it too early to be moving away from stimulus to fiscal restraint?
• TSX -64.87 to 11,504. ended lower again in volatile trading as energy and financial shares tumbled on economic uncertainty
• DOW -115.48 to 9,816 taking Dow industrials below last month's flash crash lows and the S&P 500 to its lowest close in seven months.
Dollar +.04c to 94.32cUS
• Oil -$.07 to $71.44US per barrel.
• Gold +$23.10 to $1,239.80 USD per ounce ongoing fears about euro zone debt contagion causing investors to flee to safe-haven assets, gold rallied to less than $10 below its all-time high
Ford Credit Canada applies for bank status
BY KRISTINE OWRAM
TORONTO — Ford’s Canadian lending arm is applying to become a bank so it can access a new source of funding.
Ford Credit Canada, a subsidiary of Ford Motor Co., would be able to accept consumer deposits that would be guaranteed by the Canada Deposit Insurance Corp. if the company is granted bank status, said Ford Credit spokesperson Margaret Mellott.
“It’s really very simple: our goal is to support Ford dealers and customers, and part of the way we do that is through a wide variety of funding channels and sources and this is a strategy to diversify our funding,” she said.
As a bank, Ford Credit Canada would offer guaranteed investment certificates, or GICs, as well as a “very, very limited online-only savings operation,” Mellott said.
But the company wouldn’t alter its core service, which is to provide financing for Ford dealers and customers.
If the application by Ford Credit Canada is approved, the Oakville-headquartered company will change its name to Ford Credit Bank.
The approval process is expected to be a lengthy one.
“There’s no timetable, but there’s a lot of due diligence. There’s a lot of study involved because, of course, the government will make a very measured decision,” Mellott said.
The major automakers’ finance arms suffered during the 2008-09 financial crisis as credit tightened, making it difficult or nearly impossible to raise money to fund their lending activities.
Frozen credit markets were a major factor in slumping vehicle sales in both Canada and the U.S., which served to exacerbate the recession and forced major automakers Chrysler and General Motors into bankruptcy protection.
Most automakers’ financing arms were forced to increase the credit score necessary to get a lease or loan to protect themselves from defaults after the financial meltdown. That created a vicious cycle, making it harder for consumers to lease or buy new vehicles, while it simultaneously became more difficult for dealers to get the financing necessary to keep their showrooms stocked.
Chrysler Financial was forced to wind down due to a lack of capital after Chrysler filed for bankruptcy protection in the United States in April. General Motors’ credit company, GMAC Financial Services, took over its business.
During the recession, GMAC applied for and received bank holding status in the United States, a category that made it eligible for government support, including guarantees of its debt and access to emergency loans. GMAC’s banking arm has since been rebranded as Ally and offers GICs and savings accounts in Canada.
Ford was the only one of the Detroit Three automakers that wasn’t forced to restructure under U.S. bankruptcy protection during the economic crisis. Ford Credit hasn’t applied for bank status in the United States.
The Canadian Press
Is it too early to be moving away from stimulus to fiscal restraint?
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THE CANADIAN PRESS
OTTAWA — Governments warned a day would come when they would need to tackle the most tricky and risky period of their economic recovery project. Now it’s here.
With the global economy barely emerging from what was called the worst recession in six decades, governments across Europe are already putting into practice spending restraints that go well beyond withdrawing stimulus.
Other countries, including Canada, have announced plans to follow suit next year.
The drive to consolidation — the new buzzword for austerity measures being demanded of deeply-indebted countries in Europe — is emerging as the key topic of discussion and disagreement at the upcoming G20 leaders meeting in Toronto.
Even Germany, with arguably the healthiest economy in Europe, got into the act Monday by announcing plans to cut welfare benefits, introduce new taxes and shed government jobs to save about $100 billion over the next three or four years.
But while everyone agrees governments must come to terms with ballooning deficits at some point, many analysts are questioning whether they are jumping the gun.
And getting the timing and size of consolidation wrong could be devastating, they say.
Influential economist Paul Krugman, a recent Nobel prize winner, last week referred to talk of consolidation so early in the recovery cycle, particularly with European woes mounting, as “crazy.”
“What I currently find most ominous is the spread of a destructive idea: the view that now, less than a year into a weak recovery... is the time for policy-makers to stop helping the jobless and start inflicting pain.”
Perhaps not surprisingly, only the United States is resisting the siren call of consolidation and in fact appears headed toward more stimulus, although Krugman says the drive to restraint is starting to impact some stimulus measures.
The danger is that removing stimulus and cutting spending too soon can pull the rug out from under the main driver of the economic recovery so far, and that’s the public sector.
But many are already taking the leap. Some, like Greece, because markets won’t lend them money unless they do. Others, like Canada’s admittedly mild measure last week to raise interest rates one-quarter point, because they fear the creation of inflation and asset bubbles if they keep cheap money policies in place too long.
The International Monetary Fund, which supported the weekend communique of G20 finance ministers that asked countries with challenges to accelerate the pace of consolidation, estimated 30 million jobs could be created if governments worked together on the right policies, or 30 million lost if they don’t.
“What’s at stake then in Toronto — the difference between good and bad policy — is 60 million jobs,” said the fund’s managing director Dominique Strauss-Kahn said.
But many economists are questioning whether the global economy is as strong as the pro-consolidation advocates believe, particularly with Europe likely to be mired in zero or even negative growth for years to come.
U.S.-based chief economist Nariman Behravesh of IHS Global Insight says it is far too early to be cutting public spending, adding that even Greece should be allowed some time before starting to consolidate.
“The last thing some of these economies need is fiscal consolidation,” he said.
“You get into this downward spiral in which fiscal contraction makes the recession worse, which makes the deficit worse and you get into this very bad situation that is counterproductive.”
The a real-world example of the consequences of getting it wrong is Japan in 1997, when it erroneously thought the economy was on the mend and raised taxes to repair its fiscal balance sheet.
Instead, the Japanese malaise intensified and wound up causing even bigger deficits.
Canada is regarded as being in a relatively cushy place with debt to gross domestic product ratios half to one-quarter the size of some of its G7 members, but its economy too could take a hit from a slowdown in global growth caused by poor policy decisions.
Scotiabank economist Derek Holt said governments are “between a rock and a hard place” when it comes to making the jarring move from stimulus to restraint.
The transition can be painful, as Canada found out in the mid-1990s when then finance minister Paul Martin pushed through a draconian program of higher taxes, government downsizing and funding cuts that went to social programs like health care. And Canada’s debt problems at the time were mild compared to what much of Europe, Japan and the U.S. face today.
But Canada also caught a break in beginning consolidation as the world entered one of the greatest economic expansion periods in several generations, helping Ottawa grow out of deficit. If emerging markets are strong enough to propel global growth, Europe might also prosper through restraint, said Holt.
“My gut view is that two years from now we’ll be able to say that Europe has gone through a terrible period of virtually non-existent growth, but has repaired much of the damage to their fiscal position and are better prepared for longer-run growth,” he said.
“Whereas the U.S. will be exposed as having been the sleeping giant that waited too long.”
But it could also go the other way. Behravesh said a more sensible path for the G20 to follow is to draft plans for austerity, but wait until 2012 before starting to implement them. http://news.therecord.com/Business/article/724303
Tuesday, June 8, 2010
Monday, June 7, 2010
Financial Update For June 7, 2010
• TSX -242.26. After tip-toeing carefully higher for a week, markets lurched violently lower under the weight of disappointing U.S. jobs figures and new worries about European government finances, where accusations that Hungary may have fudged some of its economic statistics -- as had been alleged previously about Greece -- raised new fears about the health of the European economy as its fiscal and sovereign debt crisis drags on. Data showing Canada continues to create solid jobs growth was brusquely dismissed by markets now grudgingly staring at a slower global recovery.
• DOW -323.31 to 9,931slid through psychological support at 10,000. The second and more crippling blow to the markets came with the release of the U.S. employment report. The eagerly anticipated report, released by the U.S. Labour Department, showed that U.S. companies added far fewer than anticipated jobs in May, putting a spotlight on the fragility of the country's economic recovery. While the United States created 431,000 jobs last month, the vast majority of those positions were temporary Census hires by the U.S. government, with only 41,000 jobs added in the private sector. Some economists had been predicting a private-sector increase of as many as 200,000 jobs.
• Dollar -.76c to 94.28cUS
• Oil -$3.10 to $71.51US per barrel.
• Gold +$7.90 to $1,216.20 USD per ounce
Janet Whitman, Financial Post Canada, which remains on much sounder economic footing than the United States, had a better-than-expected increase of 24,700 workers added to payrolls in May, with most of the gain in full-time and private-sector positions, Statistics Canada reported. Bay Street had been forecasting a 15,000 gain.
The U.S. rate isn't likely to head much lower this year or next because the expected U.S. economic growth of around 3% or 4% won't be enough to create sufficient jobs for the roughly 15 million Americans out of work and new entrants in the labour market.
Canada's strong jobs report, meanwhile, shows the Bank of Canada was on the right track by raising interest rates earlier this week despite the financial turmoil in Europe, said Benjamin Reitzes, an economist with BMO Capital Markets. "Canadian employment is now only 108,000 from the peak hit in October 2008, and is up 1.7% from a year ago, much better than the still-negative yearly change in the U.S.," he said.
The strong report indicates more interest-rate increases are coming, perhaps as soon as July, some analysts said. http://www.financialpost.com/Jobs+stall/3115343/story.html
Wal-Mart new kid on bank block John Greenwood, Financial Post •
Wal-Mart Stores Inc. changed the face of retail in North America by making life easier for the little guy through its simple formula of cutting prices and cranking up volumes.
Is banking next?
This week the retailing giant won final approval to open a bank in Canada, providing entry to an industry that has been much criticized for perceived high prices and lack of competition.
Andrew Pelletier, a spokesman for Wal-Mart Canada, said the company plans to provide "convenient and value-focused financial products and services" for its customers.
He declined to discuss details of the company's plans in advance of the official lunch of the new bank, set for June 15.
While the rise of Wal-Mart has been a boon for consumers, it has been devastating for competitors, many of whom ended up being bought out or going out of business.
In the United States, fierce resistance from the banking industry forced the retailer to abandon a bid to buy a bank early in the decade, though it continues to offer services such as cheque cashing and money transfer.
Wal-Mart applied for the licence to the Office of the Superintendent of Financial Institutions, the Canadian banking regulator, nearly two years ago. Mr. Pelletier declined to discuss why the process has taken so long.
If Wal-Mart saw opportunities south of the border where there are more than 1,000 banks fighting it out for customer deposits, there would likely be an even bigger prize waiting in this country, where the industry is dominated by a oligopoly of just six major players.
Consumer groups regularly complain about credit card fees and low interest rates on savings accounts available to bank customers in Canada. Management fees on Canadian mutual funds, most of which are controlled by the big banks, are similarly out of whack compared with the United States and other developed countries.
In the United States, Wal-Mart is a significant player in the money-transfer business, partly because many of its customers are recent immigrants still with family in other parts of the world. Additional services, such as the ability to offer deposits and make loans, would provide further opportunity to the company at a time when profits from its bread-and-butter retail business have come under pressure from the recession.
Wal-Mart would not be the first non-bank to try to break into financial services in Canada. Other retailers such as Canadian Tire Corp. and Loblaw Cos. are also working to establish themselves.
One of Wal-Mart's main advantages may be its reputation for low prices, which may help it get the word out to potential customers that it can offer a better deal than the competition at a time when Canadian consumers are scrambling for all the savings they can get.
The federal government has recently taken steps to shake up the banking sector, including the decision to make it easier for credit unions to expand across the country and the move to prohibit banks from using their websites to sell insurance.
Opening a bank is a costly undertaking for Wal-Mart and the company will likely move carefully as it plots its moves over the next few years, but it clearly believes the investment will pay off. http://www.financialpost.com/news/financials/Mart+bank+block/3115350/story.html
• DOW -323.31 to 9,931slid through psychological support at 10,000. The second and more crippling blow to the markets came with the release of the U.S. employment report. The eagerly anticipated report, released by the U.S. Labour Department, showed that U.S. companies added far fewer than anticipated jobs in May, putting a spotlight on the fragility of the country's economic recovery. While the United States created 431,000 jobs last month, the vast majority of those positions were temporary Census hires by the U.S. government, with only 41,000 jobs added in the private sector. Some economists had been predicting a private-sector increase of as many as 200,000 jobs.
• Dollar -.76c to 94.28cUS
• Oil -$3.10 to $71.51US per barrel.
• Gold +$7.90 to $1,216.20 USD per ounce
Janet Whitman, Financial Post Canada, which remains on much sounder economic footing than the United States, had a better-than-expected increase of 24,700 workers added to payrolls in May, with most of the gain in full-time and private-sector positions, Statistics Canada reported. Bay Street had been forecasting a 15,000 gain.
The U.S. rate isn't likely to head much lower this year or next because the expected U.S. economic growth of around 3% or 4% won't be enough to create sufficient jobs for the roughly 15 million Americans out of work and new entrants in the labour market.
Canada's strong jobs report, meanwhile, shows the Bank of Canada was on the right track by raising interest rates earlier this week despite the financial turmoil in Europe, said Benjamin Reitzes, an economist with BMO Capital Markets. "Canadian employment is now only 108,000 from the peak hit in October 2008, and is up 1.7% from a year ago, much better than the still-negative yearly change in the U.S.," he said.
The strong report indicates more interest-rate increases are coming, perhaps as soon as July, some analysts said. http://www.financialpost.com/Jobs+stall/3115343/story.html
Wal-Mart new kid on bank block John Greenwood, Financial Post •
Wal-Mart Stores Inc. changed the face of retail in North America by making life easier for the little guy through its simple formula of cutting prices and cranking up volumes.
Is banking next?
This week the retailing giant won final approval to open a bank in Canada, providing entry to an industry that has been much criticized for perceived high prices and lack of competition.
Andrew Pelletier, a spokesman for Wal-Mart Canada, said the company plans to provide "convenient and value-focused financial products and services" for its customers.
He declined to discuss details of the company's plans in advance of the official lunch of the new bank, set for June 15.
While the rise of Wal-Mart has been a boon for consumers, it has been devastating for competitors, many of whom ended up being bought out or going out of business.
In the United States, fierce resistance from the banking industry forced the retailer to abandon a bid to buy a bank early in the decade, though it continues to offer services such as cheque cashing and money transfer.
Wal-Mart applied for the licence to the Office of the Superintendent of Financial Institutions, the Canadian banking regulator, nearly two years ago. Mr. Pelletier declined to discuss why the process has taken so long.
If Wal-Mart saw opportunities south of the border where there are more than 1,000 banks fighting it out for customer deposits, there would likely be an even bigger prize waiting in this country, where the industry is dominated by a oligopoly of just six major players.
Consumer groups regularly complain about credit card fees and low interest rates on savings accounts available to bank customers in Canada. Management fees on Canadian mutual funds, most of which are controlled by the big banks, are similarly out of whack compared with the United States and other developed countries.
In the United States, Wal-Mart is a significant player in the money-transfer business, partly because many of its customers are recent immigrants still with family in other parts of the world. Additional services, such as the ability to offer deposits and make loans, would provide further opportunity to the company at a time when profits from its bread-and-butter retail business have come under pressure from the recession.
Wal-Mart would not be the first non-bank to try to break into financial services in Canada. Other retailers such as Canadian Tire Corp. and Loblaw Cos. are also working to establish themselves.
One of Wal-Mart's main advantages may be its reputation for low prices, which may help it get the word out to potential customers that it can offer a better deal than the competition at a time when Canadian consumers are scrambling for all the savings they can get.
The federal government has recently taken steps to shake up the banking sector, including the decision to make it easier for credit unions to expand across the country and the move to prohibit banks from using their websites to sell insurance.
Opening a bank is a costly undertaking for Wal-Mart and the company will likely move carefully as it plots its moves over the next few years, but it clearly believes the investment will pay off. http://www.financialpost.com/news/financials/Mart+bank+block/3115350/story.html
Friday, June 4, 2010
Financial Update For June 4, 2010
• TSX +31.21. as energy shares rallied on a rise in oil prices
• DOW +5.74 U.S. private sector employers added jobs in May and the services sector increased payrolls for the first time in more than 2 years, building evidence that the U.S. labor market is picking up steam
• Dollar -.26c to 96.04cUS
• Oil +$1.75 to $74.61US per barrel. after a report showed U.S. fuel consumption at its highest level in more than a year, and there was an unexpected decline in oil inventories last week.
• Gold -$12.50 to $1,209 USD per ounce there's some profit-taking in the gold sector on the back of the decline in gold
Pension shortfall hits middle class
About 20 to 25 per cent of Canadians are not saving enough to provide an adequate retirement income, says the chief economist of TD Bank Financial Group.
One of the ironies of that statistic is that these pension laggards fall into the middle class group of those who earn $30,000 to $80,000 a year, Craig Alexander said Thursday in Kitchener.
Every Canadian should have a pension that replaces 60 to 70 per cent of their employment income, Alexander said in an interview. Canadians earning more than $80,000 can generally take care of themselves, while those earning below $30,000 can replace much of that with a variety of government pension supplements, he said.
It’s that middle group that poses one of the biggest challenges, he noted.
Alexander was in Kitchener to attend a roundtable discussion chaired by Ontario Finance Minister Dwight Duncan on ways to improve Canada’s retirement income system. About 30 business, labour and pension experts met with Duncan behind closed doors.
It’s the last of a handful of meetings Duncan is holding across the province in preparation for a meeting of finance ministers in Prince Edward Island on the weekend of June 12-13 to look at Canada’s retirement income system.
While Canada’s pension system is not in crisis at the moment, issues such as pension solvency, volatile financial markets, inadequate savings by some individuals and a decrease in the number of workers with defined benefit plans that provide a fixed source of income all mean we can’t afford to be complacent, Alexander said.
A variety of options have been trotted out, such as raising Canada Pension Plan contributions, supplementing CPP benefits, raising the age at which retirement savings plans can be cashed in, offering better protection for defined benefit plans or more incentives to set up defined contribution plans, he noted.
“I don’t think there is a black and white answer to this one,” he said of the retirement income dilemma.
In any case, politicians need more data, and people need more access and knowledge about how to improve their pension coverage, Alexander said. Solutions could come from either the public or private sectors, he added, noting “I am an agnostic on that issue.”
He would like to see financial literacy courses on such issues as savings, debt, mortgages and pensions taught in school as early as Grade 8.
In an interview prior to the roundtable meeting, Duncan said that with only about 30 per cent of Canadians covered by private pension plans and more baby boomers heading into retirement, governments need to act so that pension obligations don’t cut into health-care spending and other public-sector needs.
The province has already passed one bill on pension reform that addresses some of the less contentious issues, but Duncan said he is planning more legislation in the fall to address more serious issues such as the regulation of defined benefit plans. http://news.therecord.com/Business/article/722251
• DOW +5.74 U.S. private sector employers added jobs in May and the services sector increased payrolls for the first time in more than 2 years, building evidence that the U.S. labor market is picking up steam
• Dollar -.26c to 96.04cUS
• Oil +$1.75 to $74.61US per barrel. after a report showed U.S. fuel consumption at its highest level in more than a year, and there was an unexpected decline in oil inventories last week.
• Gold -$12.50 to $1,209 USD per ounce there's some profit-taking in the gold sector on the back of the decline in gold
Pension shortfall hits middle class
About 20 to 25 per cent of Canadians are not saving enough to provide an adequate retirement income, says the chief economist of TD Bank Financial Group.
One of the ironies of that statistic is that these pension laggards fall into the middle class group of those who earn $30,000 to $80,000 a year, Craig Alexander said Thursday in Kitchener.
Every Canadian should have a pension that replaces 60 to 70 per cent of their employment income, Alexander said in an interview. Canadians earning more than $80,000 can generally take care of themselves, while those earning below $30,000 can replace much of that with a variety of government pension supplements, he said.
It’s that middle group that poses one of the biggest challenges, he noted.
Alexander was in Kitchener to attend a roundtable discussion chaired by Ontario Finance Minister Dwight Duncan on ways to improve Canada’s retirement income system. About 30 business, labour and pension experts met with Duncan behind closed doors.
It’s the last of a handful of meetings Duncan is holding across the province in preparation for a meeting of finance ministers in Prince Edward Island on the weekend of June 12-13 to look at Canada’s retirement income system.
While Canada’s pension system is not in crisis at the moment, issues such as pension solvency, volatile financial markets, inadequate savings by some individuals and a decrease in the number of workers with defined benefit plans that provide a fixed source of income all mean we can’t afford to be complacent, Alexander said.
A variety of options have been trotted out, such as raising Canada Pension Plan contributions, supplementing CPP benefits, raising the age at which retirement savings plans can be cashed in, offering better protection for defined benefit plans or more incentives to set up defined contribution plans, he noted.
“I don’t think there is a black and white answer to this one,” he said of the retirement income dilemma.
In any case, politicians need more data, and people need more access and knowledge about how to improve their pension coverage, Alexander said. Solutions could come from either the public or private sectors, he added, noting “I am an agnostic on that issue.”
He would like to see financial literacy courses on such issues as savings, debt, mortgages and pensions taught in school as early as Grade 8.
In an interview prior to the roundtable meeting, Duncan said that with only about 30 per cent of Canadians covered by private pension plans and more baby boomers heading into retirement, governments need to act so that pension obligations don’t cut into health-care spending and other public-sector needs.
The province has already passed one bill on pension reform that addresses some of the less contentious issues, but Duncan said he is planning more legislation in the fall to address more serious issues such as the regulation of defined benefit plans. http://news.therecord.com/Business/article/722251
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