May 2010 16

Canada Affected by the European Debt Crisis

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Tapping a Pencil by Rennett Stowe
investors are very nervous
photo by Rennett Stowe

The debt crisis in Europe has made many investors very nervous, but it?s not all bad news for everyone. The massive European bailout that sent stock markets soaring Monday also gave Canadian homeowners a reason to smile.

Financial instability in Europe has caused investors to flee to the safety of U.S. and Canadian government bonds. Demand for 5-year Government of Canada bonds has pushed their yields lower in recent weeks. The lower yield reduces the borrowing cost for banks, making it cheaper for them to fund their 5-year fixed-rate mortgages. With financing costs falling, Toronto-Dominion Bank took cut its mortgage rates. In the following days, most banks have done the same, decreasing their rates by between 10 and 15 basis points.

Bank of Canada Governor Mark Carney has said debt poses the biggest risk to the global recovery. A worsening crisis in Europe could delay his first post-recession interest-rate hike, even though the Canadian economy has rebounded more sharply than expected. Last month, Mr. Carney signaled he might start raising rates as soon as June 1. On the weekend though, the Bank of Canada, along with other central banks, took an effort to help raise investor confidence in Europe by re-opening currency swap lines to counter signs that lenders were stocking up on U.S. dollars.

One of the most direct ways the European crisis is affecting Canada is through currency markets. The Canadian dollar has surged 17% against the Euro this year, hitting an 8-year high Tuesday. And it has climbed 12% against the British pound. It?s making travel to Europe much cheaper this summer and turning Canada into a much costlier place for European visitors. Also, Canadian exporters are having a tougher time competing in Europe because their goods have become pricier. On the flip side, imports from Europe have become cheaper. And cheaper imports, in turn, could eventually lead to a softer inflation rate.

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