Financial Update for Jan. 22,2009

Stock markets surge on late day recovery in financials, energy

TORONTO - The Toronto stock market ended a volatile session sharply higher thanks to late day bounces in financial and energy stocks, which helped to claw back a good-sized chunk of the previous day's losses.Rising financials also helped New York markets surge, as did a well-received earnings report from IBM Corp. (Canadian press)

· TSX +252.96 to 8757.89
· DOW +279.01 to 8228.10
· Dollar 0.7928 USD
· Oil +.15 to $43.70 per barrel.
· Gold +2.20 to $852.30 USD per ounce
· www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices

Decade of debt reduction in peril

STEVEN CHASE

From Thursday's Globe and Mail

January 21, 2009 at 9:07 PM EST

OTTAWA — A five-year string of huge deficits projected for Ottawa will unwind a decade of debt reduction and leave the country more than $100-billion further in the hole, new forecasts say.

Canada's parliamentary budget watchdog and a senior private-sector economist separately released similar projections for Ottawa's financial health Wednesday, less than one week before the Harper government is set to tip Canada deep into deficit through a massive stimulus budget aimed at countering a deepening recession.

Both projections blame the deteriorating economy and an expected slow recovery.
Dale Orr of IHS Global Insight Canada forecasts Ottawa will rack up cumulative deficits of $115-billion over the next five years – an amount that would more than reverse its efforts at paying down the national debt since 1997-1998.

Ottawa has paid down $105.2-billion of federal debt in the past 11 years, starting from when former Prime Minister Jean Chrétien's Liberal administration slashed the deficit and began running surpluses.

Although more debt is not ideal, the federal government is more equipped to handle it than it was in the mid-1990s, when the national mortgage hit $562-billion. That's because the Canadian economy has grown significantly since then.

Still, Ottawa will now miss its goal of reducing the debt-to-gross domestic product ratio – a measure of an economy's ability to afford government debt – to 25 per cent by 2012.
The ratio is currently 30 per cent, and because of the faltering economy, it would only have dropped to 27 per cent by 2013-14, according to Mr. Orr. He says the effect of the stimulus package will push it to 29 per cent instead.

Kevin Page, Canada's parliamentary budget officer, said his calculations show Ottawa could run deficits over the next half decade that total between $46-billion and $105-billion. And this forecast doesn't include the tens of billions of dollars in additional spending in next week's budget.

“It's symptomatic of an economy that's going to be operating for a number of years well below its potential,” Mr. Page said.

“I think we kind of fell asleep at the switch, almost assuming we'd never get one of these downturns [again],” he said. “When you get these cyclical downturns, you're going to get revenues falling dramatically.”

Finance Minister Jim Flaherty didn't quarrel with Mr. Page's projections of up to $105-billion in deficits over the next five years.

“What we're going to do is what we've been asked to do by Canadians from coast to coast: We are going to address Canada's needs in a time of global recession,” he said.

“Canada needs some spending on the stimulus side. We will do that and that will result … in a substantial deficit.”

He said the Harper government will lay out a plan for emerging from deficits “as Canada exits from recession” in next week's budget. “We will not create a permanent, long-term deficit for Canada and I will set out how we will ensure that on Tuesday.”

Mr. Orr predicts Ottawa will end up spending $50-billion over several years in stimulus to help revive the economy and won't run balanced budgets again before 2014-2015.

Still, he noted, the additional debt will mean more money goes toward paying interest to lenders. “[It] will slightly restrict the fiscal options for future generations, and perhaps more important, threaten the hard won fiscal discipline of the past decade,” Mr. Orr said.

Both Mr. Orr and Mr. Page say Ottawa would have to cut spending or raise taxes in order to return the federal government books to a balanced position within five years.

“It's a psychological turning point for Canadians to come off 11 years of balanced budgets and surpluses,” Mr. Page said.

Mr. Flaherty said Wednesday Ottawa will offer tax breaks or incentives in the budget to revive the economy – measures sources expect will target both businesses and consumers.