Europe's debt crisis a risk here, Bank of Canada warns

Global financial conditions stemming from the debt crisis in Europe are deteriorating rapidly, placing Canada's economy under greater stress and Canadians with large debts at greater risk, warns the Bank of Canada.

The central bank's semi-annual financial stability review says bluntly that Canadians need to start worrying about the worsening debt mess in Europe, and its ability to hit home hard.

"Since June, the global retrenchment of risk associated with the European crisis has indeed resulted in a significant correction in the prices of equities and other risky assets, as well as a widening of credit spreads in Canada," the bank states.

"Should the crisis deepen and spread further to the larger European economies, transmission to Canada could become more severe ... An adverse outcome for Europe would also raise the risk of a significant impairment of funding conditions for Canadian institutions."

The report notes that the Canadian banking sector's direct exposure to the debt problems in Europe are limited, ranging from virtually zero per cent of the capital they hold in the case of Greece and Portugal, to a high of 3.4 per cent with respect to Italy.

But the analysis adds that the spillover effects on the global economy touches almost every aspect of Canada's economic and financial system, from trade, to the financial system to consumer and business confidence.

"The (bank's) governing council judges that the risks to the stability of Canada's financial system are high and have increased markedly over the past six months," the review states.

A major area of concern for the bank is the high level of indebtedness of Canadian households that have taken advantage of the low interest rate environment of the past several years to buy homes, cars and other items on credit.

The bank says while credit growth has slowed recently, it worries that it continues to rise faster than incomes despite persistent admonitions from policy-makers that one day interest rates will rise, and monthly payments to service debt will increase.

Although household debt-to-income is now at a record 149 per cent, higher than even in the United States, the bank fully expects that ratio to increase further.

That leaves Canadian households vulnerable to a shock, such as a sharp rise in unemployment caused by an economic slowdown or a significant decline in house prices, which would sap household wealth.

The bank regards the situation serious enough that it advises the government to "continuously assess the risks arising from the financial situation of the household sector."

Recently, the International Monetary Fund said Ottawa may need to again revisit eligibility rules for obtaining mortgages, even though the federal government have tightened conditions three times in as many years.

The bank doesn't go that far, but notes that after March — the last time mortgage requirements were stiffened — mortgage credit slowed, but has since picked up.

The bank also cautions that low interest rates and the weak performance of markets is putting the squeeze on pension plans, which are at a higher risk of being unable to meet their financial obligations.

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Canada swings to $885M trade deficit

Merchandise exports declined three per cent and imports rose 1.9 in October, as Canada's trade balance slipped back into deficit.

Statistics Canada reports the country's trade balance with the world fell into a deficit of $885 million in October from a surplus of $1 billion in September.

The agency says exports decreased to $38.4 billion in October, as both prices and volumes fell.

Industrial goods and materials, and energy products sectors led the decline, while automotive products was the only sector to record a gain during the month.

Imports reached a record high of $39.3 billion, as volumes increased 1.3 per cent, led by machinery and equipment, followed by energy and automotive products.

Imports from the United States rose three per cent to $24.5 billion, their highest value since October 2008, while exports fell 0.9 per cent to $27.6 billion.

As a result, Canada's trade surplus with the United States narrowed to $3.1 billion in October from $4.1 billion in September.

Exports to countries other than the United States fell 7.9 per cent to $10.8 billion. Imports from countries other than the United States edged up 0.1 per cent to $14.7 billion.

Canada's trade deficit with countries other than the United States increased to $4 billion in October from $3 billion.

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GG urges Canada to ramp up productivity

Canada can't afford to hunker down in the midst of global economic turmoil, Gov. Gen. David Johnston said in an interview just before the start of a 15-day trip to southeast Asia.

He said the future is at stake.

"If we want our children to have lives that are at least equal or better than ours — which has been a great Canadian dream — then we certainly have to do better on innovation and productivity," he said.

Governor General David Johnston takes part in an interview at Rideau Hall in Ottawa on Thursday, November 10, 2011. THE CANADIAN PRESS/Sean Kilpatrick Sean Kilpatrick/Canadian Press

Johnston leaves for Malaysia, Singapore and Vietnam on Saturday. He's looking to learn about Asian competitiveness, tout Canada as a prime destination for foreign investment and immigration and find opportunities for Canadian interests.

"We should broaden our horizons," he said in the library at Rideau Hall, where the walls are lined with award-winning Canadian works.

"We should look at the globe entirely as we think about markets and think about opportunities that Canadian expertise can exploit. And that would be a main purpose of this trip....seeing the world as not just North America, not just our backyard."

Long gone are the days when Canadians could depend simply on natural resources or a low Canadian dollar to make money, Johnston said.

And now, with the International Monetary Fund warning of a "lost decade" due to weakness in the United States and Europe, Canadian business can't look to its traditional markets to pick up the slack, he warned.

"It seems to me it's very important for Canada to be a trading nation with the entire globe. And the Asian area is the fastest-growing part of the globe. So we should be there."

Indeed, his trip to southeast Asia was requested by the Prime Minister's Office and comes just as Stephen Harper and Finance Minister Jim Flaherty are in Hawaii meeting with other Asia-Pacific leaders to discuss trade and economics.

Flaherty will go on to China and Japan, following in the tracks of Natural Resources Minister Joe Oliver, who was there this week.

Their message echoes that of Mark Carney, governor of the Bank of Canada: if Canada is to thrive, businesses need to get off their wallets and move aggressively into markets that are actually growing, especially in Asia.

But that's far easier said than done.

Canada's productivity — a key to being globally competitive —is mediocre at best and needs to pick up speed, Johnston said.

Johnston, who has a long history of promoting innovation in Canada, recently had dinner with Jeff Immelt, the chief executive officer of General Electric Co., a company Johnston says serves as a prime example of how Canadian firms should behave in the face of adversity.

"They've never hunkered down. When it's in recession times, they are looking even more aggressively at world markets, at the clusters of activity where they are operating in and determining how they can be one of the best in the world."

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Occupy Wall St. protest to march into Canada

Activists are planning an occupation of Toronto's financial district as well as other Canadian cities following in the footsteps of protesters currently camped out on Wall Street in New York City.

A group calling itself Occupy Toronto Market Exchange has launched a website to organize a march on Bay Street beginning Oct. 15.

That's a Saturday, when the stock exchange is closed and few people are working in Canada's financial capital.

About 830 people on Facebook have replied they would attend the event in Toronto.

Occupations are also planned in the streets in other Canadian cities, including Vancouver, Montreal and Calgary.

South of the border, protesters speaking out against corporate greed and other grievances remain in Manhattan's financial district.

They are holding their ground even after more than 700 of them were arrested Saturday during a march on the Brooklyn Bridge in a tense confrontation with police.

The group Occupy Wall Street has been camped out in a plaza for nearly two weeks staging various marches, and had orchestrated an impromptu trek to Brooklyn.

Protesters are speaking out against corporate greed, government bailouts, and income inequality amid high unemployment and the prospect of another recession.

Canada's economic growth has been slowing, leading some to believe this country could also be headed for recession.

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Air Canada flight attendants turn down labour deal

Air Canada (TSX:AC.A) suffered yet another labour setback on Saturday with word its flight attendants have rejected a tentative agreement reached earlier this month.

The union representing the roughly 6,800 flight attendants, the Canadian Union of Public Employees, said in a news release that 87.8 per cent of those who voted gave the tentative agreement a thumbs down.

"The results send a strong message to the company," Jeff Taylor, President of the Air Canada Component of CUPE, said in the news release. "We have heard our members loud and clear."

"After a decade of concessions, the membership has clearly said it wants a fair deal, especially since the company is in a much better financial position," Taylor added.

The union noted that turnout for the vote was high, with 78.6 per cent of members casting a vote.

A strike vote will be organized for next month, and union officials will meet with management as soon as possible on resuming talks, Taylor added.

Air Canada issued a terse release acknowledging the rejection, but offered little other immediate comment.

The airline has grappled with serious labour troubles this year with its customer service agents going on strike for three days.

The two sides reached an agreement and the strike ended after the federal government indicated it would bring in back-to-work legislation.

Air Canada pilots also rejected an agreement hammered out earlier this year and they have yet to negotiate a deal. The airline is also negotiating with mechanics and baggage handlers, represented by the International Association of Machinists and Aerospace Workers.

A major issue in negotiations with all of the unions is over pensions.

The unions say the airline wants to establish a defined contribution pension plan for new hires, instead of the current defined benefit plan.

With defined contribution plans, the company's contribution is limited to a set, negotiated amount.

Payouts to retirees depend on the performance of the underlying investments. Defined benefit plans require a set amount to be paid to retirees.

Air Canada says high fuel costs are threatening its future profitability and it said this month it would raise fares and try to trim costs where possible to offset that.

The airline posted a $46 million loss in the spring quarter ended June 30 due to the cost of fuel.

But that was a big improvement over last year, when the losses were far greater.

Canada's largest airline and its regional partners carry about 31 million passengers annually to more than 170 destinations on five continents.

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Americans in Canada may be unknowing tax evaders

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Americans living in Canada are discovering that even if they haven't lived or worked in the United States in years, they're still required to fill out a U.S. tax return, and if they don't file returns by August 31, they could be facing some stiff financial penalties.

Christina Simmons is a U.S. citizen who has been living and working in Windsor, Ont., as a professor for more than 25 years. She didn't learn until recently that the IRS has been cracking down on Americans who don't file forms declaring what's in their bank accounts along with their U.S. tax returns.

"They're really enforcing it and there's going to be these really big fines if you don't do it," said Simmons. "I decided to get some help with it since I had never done the form before," she said.

The Internal Revenue Service website has a 22-page document to help Americans living abroad, but there are no easy answers to be found there and many don't even know they have to file in the U.S. — a law which has been in place for years.

The IRS has set up the Offshore Voluntary Disclosure Initiative, which is giving those who have broken the law, knowingly or not, a bit of a break.

Applicants have until Aug. 31 to voluntarily file taxes and banking information dating back to 2003 in exchange for less severe civil penalties.

"If it's an effort to solve the U.S. financial problems that's not going to help," said Simmons. "They just need to raise their tax rates which are incredibly low for the developed world, so that's what really bothers me. Canada, Europe, you know, people pay a lot more in taxes for good reasons."

Gordon Lee, a Windsor, chartered accountant said he has been helping clients meet the Wednesday deadline. What confuses people is that most countries base taxation on residency, but in the U.S. taxation is based on citizenship, said Lee — citizens have to file from whatever country they live in, for as long as they live.

"I think the undercurrent is they detest it," Lee said. "This is not what I do, telling people they have to pay penalties, but unfortunately the law is there and you better to pay the smaller penalties rather than the big penalties later."

Lee said the U.S. government wants a piece of what's in Canadian retirement savings accounts, bank and investment accounts.

"It's either five per cent, 12 and a half [percent], or 25 per cent depending on the circumstances," he said.

In 2006 there were almost 7,000 Americans living in Windsor. Lee said those who cross the border into Michigan could be getting stopped in the near future if they haven't paid their dues to Uncle Sam.

The chances of the IRS catching those who don't voluntarily file will go up in 2013 when a law requiring Canadian banks to share client information with the U.S. government takes effect.

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Tech mergers rise in Canada

The number of mergers and acquisitions in Canada's technology sector was up substantially in the second quarter, according to a report by consultants Ernst & Young.

The firm said Monday that Canadian companies inked 30 technology deals in the second quarter — sixth-most in the world — up from 21 deals in the same quarter of 2010.

Canadian companies spent about $240 million to acquire foreign companies in cross-border deals, while Canadian firms sold about $480 million worth to foreigners.

The report was issued on the same day as a blockbuster takeover shook up the technology world, with Google announcing it would buy Motorola Mobility for $12.5 billion US.

Ernst & Young described the increase in deals during the quarter as a "surge" and attributed it to innovation in social media, cloud computing, smart mobility, Internet and mobile video, and smart grid and solar energy.

"New waves of innovation...are driving large and small deals across the globe," Tony Ianni, the company's head of corporate finance in its advisory services sector said in a statement.

"Interest in the technology sector continues to rise as information technology evolves into an increasingly valuable component of all products and services," says Ianni.

Canada outranked technology heavyweights Japan and Taiwan when it came to the number of deals, but American, British, Chinese, German and French companies made more deals.

"Canada saw the second-highest number of cross-border deals, behind the United States — an uptick in volume and value we've seen developing over the last several quarters," Ianni said.

"But the question on everyone's mind is whether deal-making will lose momentum or continue to overcome increasing divergence between buyers and sellers over valuation, geopolitical unrest and global debt issues."

Ernst & Young said the average value of global technology deals grew to $52 million, from $30 million in the same quarter last year.

Big-ticket deals worth $1 billion or more and cross border transactions played a big part in driving up the total value, the firm said.

After the quarter ended, a consortium that included Apple Inc., Ontario-based Blackberry maker Research In Motion Ltd., Microsoft Corp. and Sony Corp. agreed to pay $4.5 billion for a collection of 6,000 patents from Nortel Networks, a bankrupt Canadian maker of telecommunications equipment.

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GM Canada creates $2.5 B health care trust fund

General Motors of Canada Ltd. will put $2.535 billion into a trust fund to finance health care costs for its retirees, the Globe and Mail reports.

The fund is expected to save GM Canada billions of dollars because retiree health care costs will be taken off its books.

But it means reduced benefits for about 30,000 retirees and surviving spouses of GM workers.

GM Canada has reached an agreement with representatives of its unionized retirees to finance the fund with an initial cash payment of $1 billion, plus another $1.535 billion in contributions between 2014 and 2018.

The creation of the trust fund to pay for dental care, glasses and other health benefits was a condition of the $10.8 billion contribution the federal and Ontario governments made to the bailout of GM Canada's parent company, General Motors Co.

The agreement with the retirees is subject to approval by courts in Quebec and Ontario, but it is opposed by a group of retirees from the company's massive operations in Oshawa, Ont.

"The contributions by GM Canada to the Auto Sector Retiree Health Care Trust will not be sufficient to maintain the retiree health care benefits at their current levels," says an information package prepared for retirees.

"Consequently, it is expected that benefits will have to be reduced or otherwise modified to ensure that the available funds will be sufficient to look after the needs of current and future retirees for their lifetimes."

Estimates done by actuaries for the retirees show the value of the plan represents between 77 per cent and 84 per cent of the value of the existing coverage, which was financed by GM Canada and adjusted according to contracts negotiated with the Canadian Auto Workers.

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