its okay though b/c we have a sound banking system?http://www.vancouversun.com/business/2035/Euro+crisis+could+cross+ocean+Bank+Canada/6787247/story.html
Canadian households be warned: Your finances could soon be hit with a big shock.
The spillover from an unbridled European financial crisis would carry over to this side of the ocean, first rocking the U.S banking sector and then ours. Already debt-burdened households would begin defaulting on their mortgages, banks would start tightening their lending, jobs would be lost and the hot housing market would go into the deep freeze, as fewer people would be able to buy. And, oh yes, interest rates would jump.
That's the bleak picture painted by the Bank of Canada on Thursday in its biannual Financial System Review.
Given all the uncertainty around the eurozone's worsening finances, this may not even be the worst-case scenario. "Conditions in the international financial system are fragile," the central bank said in the review. "If the sovereign debt crisis in Europe continues to intensify, it would further weaken global economic growth and prompt a general retrenchment from risk. In turn, the weaker global out-look would fuel sovereign fiscal strains and impair the credit quality of bank-loan portfolios."
Over the past six months, these growing concerns "reflect widespread doubts about the capacity and resolve of policy-makers to address unsustainable fiscal situations, the capital adequacy of some euro-area banks and the underlying balance-of-payments problems within the euro area," the review says.
The central bank warns that "if these issues are not dealt with in an orderly way, the contagion effects on global financial conditions could be significant."
In Canada, the high indebtedness of households and bloated house prices "require continued vigilance."
"These conditions make house-holds especially vulnerable to adverse shock," the bank said, adding that high household debt levels continue to be "the most important domestic risk to financial stability in Canada."
To be sure, some Canadian consumers have heeded calls for restraint from the likes of Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney.
The central bank noted that house-holds have been piling on debt at a slower rate recently, with the ratio of debt-to-income basically unchanged from a peak of 150.6 per cent in the last quarter of 2011 - but that's still higher than households in the U.S. and the U.K.
Growth in borrowing - both for mortgage and non-mortgage purposes - has slowed from an annualized six per cent between May and October 2011 to four per cent from November 2011 to April 2012.
"Households need to be cognizant of the fact that borrowing rates will eventually normalize and ensure that they will be able to service new and existing debt over the duration of their loans."
The Bank of Canada went even further in its analysis, saying house-holds could be hit by two inter-related shocks - a big drop in house prices and a "sharp deterioration in labour market conditions."
"The initial decrease in house prices may be amplified by the links with the real sectors of the economy as lower confidence and lower household net worth lead to reduced household spending and employment. These interrelated factors would reduce economic activity and increase strains on household balance sheets."
The "elevated" supply of condominiums entering the market over the next few years "is particularly noteworthy," the bank said.
"Adjusted for population levels, multiples under construction in major metropolitan areas, especially Toronto, are above historical highs. If these units are not absorbed by demand as they are completed over the next 18 to 36 months, the demand-supply imbalance will become more pronounced."
Also under the bank's shock scenario, Canada's jobless rate would rise by three percentage points and lengthen the average period of unemployment by six weeks.
"When subjected to a persistent unemployment shock that reaches its peak in 2013, the proportion of household loans in arrears at domes-tic financial institutions is projected to rise to 1.3 per cent, compared with roughly 0.5 per cent in the fourth quarter of 2011.
Read more: http://www.vancouversun.com/business/20 ... z1xsg0XTqb