A Happy New Year isn't likely for the economy

Markets anticipate a light trading day

RTGAM


With light action expected for North American stock markets in the last trading day of 2007, global indicators are mixed and the Canadian dollar remains above parity with the greenback.
The loonie opened at 101.96 cents (U.S.), down just three one-hundredths of a cent from Friday's close.

Wall Street futures suggest a modestly higher open as investors await a report on U.S. home sales and look to close a volatile year.
Light sweet crude oil rose 19 cents to US$96.19 per barrel in pre-market electronic trading on the New York Mercantile Exchange.

Overseas, Britain's FTSE 100 fell 0.57 per cent and France's CAC-40 fell 0.45 per cent.
On Friday, the Toronto stock market racked up a solid gain of more than 100 points, with almost all sectors positive in a broad-based advance led by financial and energy stocks. It was a different story in New York, where early strong gains disappeared after a grim report on the U.S. housing sector.

Toronto's S&P/TSX composite index closed up about 145 points to 13,821.
In New York, the Dow Jones industrials drifted about six points higher to 13,365. The Nasdaq composite index slipped two points to 2,674, while the S&P 500 index edged up two points to 1,478 as data showed that sales of new U.S. homes plunged last month to their lowest level in more than 12 years.

Copyright 2001 The Globe and Mail

TheStar.com - columnists - A Happy New Year isn't likely for the economy

CP PHOTO

Governor David Dodge leaves the Bank of Canada building in Ottawa, in this October 2005 file photo.

December 30, 2007

David Crane

In the New Year just ahead, our biggest challenge will be to clean up the financial mess from 2007, in the hope that 2009 will be better.

This means that 2008 won't be a fun year. Rather, it will be a year in which many people could lose their homes, while others lose their jobs and many businesses find they can't get the credit they need to survive and grow.

Canada is in a somewhat better position than the U.S., although the Bank of Canada has also had to play a supportive role in financial markets and special arrangements are having to be made to restructure $33 billion of asset-backed commercial paper in Canada.

Perhaps more importantly, Canada will feel the spillover impact of slow growth south of the border or across the Atlantic in Europe. This means our own economy will slow, with export sectors such as autos and softwood lumber especially vulnerable.

As Stephen King, the chief economist at HSBC puts it, "the excess liquidity of recent years has gone down the plughole. In its place is a credit squeeze," which indicates "a financial system in crisis."

This credit crunch – the most important economic development in 2007 – means that banks are hanging on to their cash and have become more cautious both in who they lend to and how much they want to lend.

This year, central banks like the Bank of Canada have been concerned primarily with injecting liquidity into the financial system in order to prevent a financial collapse. A liquidity crisis occurs when financial institutions cannot generate immediate cash to meet their obligations because the assets they hold cannot be quickly converted to cash.

To keep the system afloat, central banks have made more than $500 billion of cash available in loans to banks in Canada, the United States, Britain, the Eurozone and Switzerland while also cutting the interest rate they charge banks on what are supposed to be short-term loans. More financial support, and further interest rate cuts, may be needed in the coming year.

The Bank of Canada recently cut its overnight target rate from 4.50 per cent to 4.25, and some economists expect it to decline to 3.50 per cent by this time next year.

But while the focus this year has been on maintaining liquidity in the financial system, the challenge in 2008 will be all about solvency. Banks will be forced to revalue their outstanding loans and the extent to which they may need capital infusions to keep them alive. They may find that they have made billions of dollars in bad loans.

In fact, a number of large banks, including some in Canada, have already been forced to take major write-downs. But more are expected in the coming year. If the news is really bad, then governments may be forced to intervene in an even bigger way.

This revaluation has already forced some of the world's biggest banks to seek new capital from government-owned sovereign wealth funds in the Middle East, Singapore and China. This trekking is probably far from over.

Middle Eastern and Asian governments, through these funds, will end up owning significant chunks of the world's top U.S., British and Swiss banks.

What makes all of this even scarier is that no one really understands how the New Year will unfold. One reason is that we don't know how much bad debt is hidden in the books of the banks. Another is that we don't know how quickly confidence and trust can be restored.

While we all wish one another Happy New Year, the reality is that 2008 is unlikely to be a happy year.

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David Crane's column on Global Issues appears Sundays.

Subprime fiasco to dominate early 2008 TheStar.com - Business - Subprime fiasco to dominate early 2008

TOM STATHIS/ASSOCIATED PRESS

A sign advertises a bank repossessed home for sale in San Clemente, Calif., Aug. 5 in continuing fallout from the U.S. subprime mortgage crunch

We should learn in new year the extent of fallout from crisis

December 30, 2007

Madhavi Acharya-Tom Yew
Business Reporter

The first few months of 2008 may bring some clarity on how much money will actually be lost to bad loans made to high-risk borrowers in the subprime mortgage debacle, economists and stock market watchers say.

Observers are asking, will the tally be as high as the $400 billion (U.S.) some predict, or will the actual damage come in at less than that.

Either way, the financial crisis is likely to rank as one of the biggest the U.S. has seen. On the other hand, escaping the worst-case scenario would be a boon to a U.S. economy teetering on the brink of recession.

An estimated $1.3 trillion in subprime mortgages are outstanding. About one-tenth of those are now in foreclosure. Some are predicting that foreclosures will grow to a staggering $400 billion. But will those predictions come to pass?

"We've had some defaults up until this point, but the really heavy period for resets is really in the first quarter of next year," said Mark Chandler, senior fixed income analyst at RBC Capital.

Subprime borrowers, who have poor credit histories and don't qualify for the usual bank mortgages, were allowed to "self assess" their income and ability to pay back the loans. Such borrowers have since come to be known as ninjas – no income, no jobs or assets.

Subprime mortgages carry a higher interest rate – as high as 12 per cent. But the would-be U.S. home owners were offered teaser rates – or 2/28 mortgages, which offered a low introductory rate for two years, followed by a higher one for the remaining 28.

Many of those mortgages are due to reset with higher monthly payments in January and February.

But there's reason for optimism.

U.S. President George W. Bush has hammered out a relief plan that will freeze interest rates for some home owners, keeping their monthly payments manageable and helping them hang on to their homes.

"The actual realization of the performance of those loans and those mortgages is the next real hurdle," Chandler said. "The rates could be frozen and there may be less in the way of foreclosures and defaults than people think."

Given the risk of huge write-offs and foreclosures, banks have become skittish about lending to consumers, and to each other, but central banks in many Western nations, including Canada, have stepped in with emergency funds meant to keep the cash flowing.

Banks and other financial institutions, those that made subprime loans directly as well as those that invested in securities that used subprime loans as collateral, are scrambling to give themselves a cushion. They're taking huge writedowns, trying to remove billions of dollars of suspect assets from their books with the stroke of a pen, and a flurry of headlines.

Analysts said last week that Citigroup may have to write off $18.7 billion in the fourth quarter, up sharply from the $8 billion to $11 billion initially estimated.

CIBC said earlier this month its profits may take a $1 billion hit because of its investment in a U.S. company with subprime real estate exposure. That's on top of a $9.8 billion writedown already taken.

The grim accounting has some economists asking whether markets are now overestimating the damage after months of being exposed to bad news.

"It's possible the market is overestimating, as it usually does. Most of the bad news may be already discounted – and that may be the good news," said Benjamin Tal, senior economist with CIBC World Markets.

On the economic side, the picture is bleak, with many signs pointing to slowdown. In the past 12 months, sales of new homes across the United States have plunged by 34 per cent – the biggest year-over-year slide since early 1991.

And the latest economic figures show that orders for durable goods rose only slightly in November as businesses received fewer orders for machinery, computers and communications equipment.

Maurice Levi, finance professor at the University of British Columbia, is worried about the impact on consumer spending.

He says he's more concerned about the people who just barely manage to hang on to their homes. "If it were me, I wouldn't want to throw in the towel. I would find other ways to try to make those payments, not change the cars, not take a vacation. Even the others who aren't in such critical condition might be spending less. This might bring a very slow economy."

The problem the central banks face is that if they don't inject enough liquidity into the market, the country may slip into recession. If they overdo it, it creates an excess supply of money – inflation.

"Getting it right is unbelievably difficult. This is not something that is a repeated event from many times before where you've had an opportunity to learn. We've never had subprime problems before," Levi said.

Some suggest the government's intervention will only prolong the trouble. After all, the West spent the 1990s hectoring Japan to just own up to its bad loans, suffer the economic consequences – unemployment, bankruptcies – and move on. "It's always easier to tell other people to take harsh medicine," said Doug Porter, deputy chief economist at BMO Nesbitt Burns.

"I think the best thing for policy makers is try to cushion the blow but not distort the market. Let the real value of credit and homes come through and then deal with the aftermath. But that's a lot easier said than done."

Fearless forecasts for 2008 TheStar.com - Business - Fearless forecasts for 2008

Day in history

Born this date in history, this Welsh actor is best-known for his character Hannibal Lecter in Silence of the Lambs.

(Answer, reverse:

Sinkpoh Ynohtna.) =Anthony Hopkins

December 31, 2007

Caveat emptor: "Avoid making predictions – especially about the future."

–Sam Goldwyn

1. The Summer Olympics and spectacular new Beijing architecture erases the tainted-import stories of 2007.

2. Dynamic French president Nicolas Sarkozy emerges as the leading voice for Europe, abetted by British PM Gordon Brown, less of a Europhile than his predecessor.

3. The recent addition to Europe's passport-free Schengen zone of nine members, bringing the total to 24 countries with 400 million people, prods a 2008 expansion to include Switzerland, one of the world's most isolationist nations. This increases pressure on Britain to join on economic grounds of lower transport costs, and on Russia not to thwart Ukraine, Romania and other former Soviet satellite states from membership in an economic power bloc already eclipsing the U.S.

4. Afghanistan and Pakistan's western border region finally become the central front in the struggle against terrorism by Islamic extremists, as they should have been from the start. The pro-U.S. Sarkozy sends additional troops which, in contrast with the current French concentration in relatively stable Kabul, are deployed in the more dangerous east and south, bolstering Canadian and British forces in Kandahar and Hellmand provinces. Britain increases its troops in the southwest, and Australia joins the cause. The U.S. steps up its redeployment of forces from Iraq to Afghanistan.

5. In part to enhance his party's electoral prospects in Quebec, Stephen Harper unveils a revamped reconstruction and humanitarian-relief program for Afghanistan.

6. In referenda, Colombia and ethnically divided Belgium narrowly vote against national breakups. Kosovo and Chechnya continue to lack sufficient outside support to separate from Serbia and Russia, respectively, although Kosovo unilaterally declares its independence.

7. Newly elected Russian president Dmitry Medvedev, 42, is predecessor Vladimir Putin's puppet, as expected, but the Deep Purple music fan starts calling his own shots by year-end.

8. Kevin Rudd, new Australian PM after defeating John Howard last year, rejects Australia's George W. Bush-granted status as America's local "sheriff." The Aussies continue their decades-old humanitarian and conflict-resolution work in the Solomons and elsewhere in the region but on their own terms.

9. Stephen Harper forms a second minority government in a fall election. Stephane Dion retires from the Liberal leadership after a miserable Grit showing.

10. In narrow victory over John McCain, Hillary Rodham Clinton is elected 44th U.S. president.

11. Barack Obama accepts president-elect Clinton's offer to nominate him U.S. secretary of state.

12. Food is the new oil. Biofuel and developing-world demand will keep soaring prices for wheat, corn and other agricultural commodities high. Investors like fertilizer giant Potash Corp., grain handlers Agrium and Viterra (the former Saskatchewan Wheat Pool), and farm-equipment makers Deere, Caterpillar and Case New Holland.

13. Nuke stocks glow. North America is slowly shedding its wariness of nuclear power, also poised for big gains in Europe and Asia. Investors go for uranium producers including Canada's Cameco, and turbine makers GE and France's Alstom.

14. Safer than sorry stocks are in favour amid continuing upheaval in capital and equity markets. Sound "buy and forget" stocks include GE, Procter & Gamble, PepsiCo, Shoppers Drug Mart, United Technologies (Otis, Carrier, Pratt & Whitney) and reasonably priced utilities.

15. GM emerges as an unlikely turnaround play, as benefits begin to kick in from production cuts, reduced healthcare burden and more vehicles with showroom appeal.

16. With a massive oil discovery off its Atlantic coast this summer, Brazil is poised to attain the status of an OPEC producer, and may well join OPEC by 2010.

17. Rupert Murdoch, whose long ownership tenure at the Times of London has not restored the Times' prestige, surprises fretful journos by making only cosmetic changes to his newly acquired Wall Street Journal.

18. Ottawa raises no objections to takeover bids for Canadian-owned oilpatch giants Suncor Energy Inc. and EnCana Corp. by consortia formed among Britain's BP PLC, Anglo-Dutch producer Royal Dutch/Shell Group PLC, France's Total SA, Italy's ENI SpA and Spain's Repsol YPF.

19. A troubled Palm Inc., pioneer in PDAs and once a potentially formidable rival to Ontario-based BlackBerry maker Research in Motion Ltd., puts itself on auction block.

20. Hapless Nortel, having this year abandoned its third-generation wireless (3G) business – once a cornerstone of future growth prospects – talks merger with Cisco, the healthiest survivor of the telecom crash of 2000-02.

21. Hapless Motorola, after this year sacking its second CEO in three years, talks merger with a Nokia seeking a stronger foothold in North America.

22. Hapless French telecom giant Alcatel-Lucent wearies of CEO Patricia Russo's failure to deliver on turnaround plans; opts this time for a CEO fluent in French.

23. Amid continuing distribution woes at partner Loblaw Cos. that keep its Joe Fresh apparel boutiques out of stock, design maven Joe Mimran begins devoting most of his time to his other businesses.

24. Auto-parts investors shift into Linamar and Martinrea, two straightforward companies with appealing growth potential, and out of Magna International Inc., soon to be controlled by a convoluted partnership between founder Frank Stronach and Russian oligarch Oleg Derapaska, overly dependent on sales to Detroit's ailing Big Three, and a backdoor financier of a Stronach racetrack enterprise that seems fated never to succeed.

25. Lingerie merchant La Senza, now owned by the parent of Victoria's Secret, begins rebranding itself under the better-known VS banner, despite protestations to the contrary by La Senza CEO Irv Teitelbaum at the time of company's 2007 sale.

26. Quebecor Inc. spins off basket case Quebecor World, briefly the world's largest printer, but now close to unsalvageable after acquisition-related culture clashes, price wars and failure to keep costs down in a sector with notoriously thin margins.

27. In a bid for critical mass, Royal Bank of Canada explores merging its southeastern U.S. retail banking franchise with Atlanta-based SunTrust Banks, the dominant regional player, in exchange for a controlling equity stake in the combined firm.

28. The troika spearheading the Loblaw Cos. turnaround bid, including Galen Weston Jr., will show substantial progress in solving the firm's distribution crisis or will be replaced by year end with a distribution expert from logistics-savvy Wal-Mart or Target.

29. London widens its lead over New York as the world's financial capital as subprime-mortgage defaults and soured loans to precariously financed private-equity buyouts further weaken the balance sheets of America's largest banks and brokers.

30. Oscar loves Atonement.

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Quotable tycoon

"The difference between a skinflint banker and a reckless banker is a recession."

–Walter Wriston, CEO of Citibank (now Citigroup Inc.) in the 1980s.