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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FAQ on Europe's 'fiscal union'

All European Union states except Britain moved toward setting up a new treaty Friday, giving up crucial powers over their own budgets in an attempt to overcome a crippling debt crisis.

All 17 countries that use the euro are definitely signing up. Nine non-euro states — Denmark, Latvia, Lithuania, Poland, Romania, Bulgaria, Hungary, Sweden and the Czech Republic — said they would consult their parliaments before joining in. In some of those countries, however, parliaments are less than enthusiastic.

The U.K. gave a clear "no" after it failed to get the eurozone to approve special safeguards for its financial center from EU regulation.

For the past two years, the countries that share the euro have been rocked by a debt crisis that has recently threatened the survival of the currency. Germany and France in particular argued that only tough rules enshrined in a treaty would convince markets that all countries will be able to repay their debts and a similar crisis will never happen again.

Debt brakes in national constitutions. All 23 countries commit to keep their deficits below 0.5 per cent of economic output. That cap can be broken to counteract a recession or in other exceptional circumstances. The European Court of Justice will make sure all states' debt brakes are effective.

More automatic penalties for deficit sinners. In the past, governments often protected their partners from being punished.

All states have to tell their partners in advance how much debt they plan to take on through bond sales.

The eurozone, together with other willing EU states, will give as much as 200 billion euros to the International Monetary Fund to help it rescue troubled nations.

The eurozone's permanent bailout fund, the European Stability Mechanism, will take over from the current rescue fund, the European Financial Stability Facility, one year ahead of schedule, in July 2012. Unlike the EFSF, the ESM has paid-in capital, similar to a bank, and is therefore more credible on financial markets.

The ESM's decision-making process was simplified in emergency situations, allowing struggling countries to get financial help if an 85 per cent majority of capital holders agree. That is meant to stop small countries from blocking or slowing down urgent rescues, as has happened in the past.

The eurozone eased rules that have forced banks and other private investors to take losses when a country gets a bailout from the ESM. The previous push to inflict losses on bondholders has been blamed for exacerbating the crisis.

Eurozone leaders did not decide to boost the overall firepower of their own bailout funds, which is currently limited to 500 billion euros. They promised to reconsider that cap in March, shortly before the ESM comes into force.

They did not agree to more intrusive powers for the European Commission over the fiscal policies of wayward states, as had been demanded by European Council President Herman Van Rompuy and some nations. Instead, they promised to "examine swiftly" much more lenient proposals from the Commission.

They did not allow the bailout funds to directly recapitalize failing banks. That could have prevented countries from taking on more debt when they have to bail out lenders.

Stock markets and the euro rose modestly in reaction to the deal, but many details remain to be worked out. Much will depend on whether the stricter fiscal rules can persuade the ECB to unleash massive funds to buy up bad eurozone debt.

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Encana questions fracking findings in U.S.

The U.S. Environmental Protection Agency may have linked fracking — a controversial method of improving the productivity of oil and gas wells — to groundwater pollution for the first time.

An Encana warning sign on a farm field gate in Pouce Coupe, B.C. Betsy Trumpener and Robert Doane/CBC

The EPA announced Thursday that it found compounds likely associated with fracking chemicals in the groundwater beneath Pavillion, a Wyoming community where residents say their well water reeks of chemicals.

The EPA said its announcement is the first step in a process of opening up its findings for review by the public and other scientists.

"EPA's highest priority remains ensuring that Pavillion residents have access to safe drinking water," said Jim Martin, EPA regional administrator in Denver. "We look forward to having these findings in the draft report informed by a transparent and public review process."

The EPA also emphasized that the findings are specific to the Pavillion area. The agency said the fracking that occurred in Pavillion differed from fracking methods used elsewhere in regions with different geological characteristics.

The fracking occurred below the level of the drinking water aquifer and close to water wells, the EPA said. Elsewhere, drilling is more remote and fracking occurs much deeper than the level of groundwater that would normally be used.

Calgary-based Encana owns the Pavillion gas field. An announced $45-million US sale to Midland, Texas-based Legacy Reserves fell through last month amid what Encana said were Legacy's concerns about the EPA investigation.

Encana spokesman Doug Hock said there was much to question about the draft study. The compounds EPA said could be associated with fracking, he said, could have had other origins not related to gas development.

"Those could just have likely been brought about by contamination in their sampling process or construction of their well," Hock said.

The low levels of hydrocarbons found in local water wells likewise haven't been linked to gas development and substances such as methane are naturally occurring in the area.

"There are still a lot of questions that need to be answered. This is a probability and it is one we believe is incorrect," Hock said.

In a statement on its website, Encana says it remains committed to seeing that the investigations into determining the source of the compounds found in the Pavillion groundwater are backed by sound science that is reviewed by independent peers.

But environmentalists welcomed the news of the EPA report, calling it an important turning point in the fracking debate.

'Those of us who suffer the impacts from the unchecked development in our community are extremely happy the contamination source is being identified.'— Pavillion resident John Fenton

"This is an important first indication there are potential problems with fracking that can impact domestic water wells. It's, I think, a clarion call to industry to make sure they take a great deal of care in their drilling practices," said Steve Jones of the Wyoming Outdoor Council.

Pavillion resident John Fenton, chairman of the group Pavillion Area Concerned Citizens, applauded the EPA for listening to the homeowners with contaminated water.

"Those of us who suffer the impacts from the unchecked development in our community are extremely happy the contamination source is being identified," Fenton said.

The finding could have a chilling effect in both Canada and the U.S. where various levels of government are trying to determine how to regulate the controversial process. Hydraulic fracturing involves pumping pressurized water, sand and chemicals underground to open fissures and release natural gas and oil trapped in the rock formations.

The industry has long contended that fracking is safe, but environmentalists and some residents who live near drilling sites say it can poison groundwater and release toxic gas into the air.

As part of the investigation, the EPA drilled two deep monitoring wells in the local aquifer and found synthetic chemicals, like glycols and alcohols consistent with gas production and hydraulic fracturing fluids. It also found benzene concentrations well above Safe Drinking Water Act standards and high methane levels in the deep wells.

The EPA also sampled drinking water from area wells and found chemicals consistent with migrations from areas of gas production in the drinking water, but still below established health and safety levels. Nevertheless, health officials advised residents not to drink their water or use it for cooking.

"Given the area’s complex geology and the proximity of drinking water wells to ground water contamination, EPA is concerned about the movement of contaminants within the aquifer and the safety of drinking water wells over time," said the draft report on the investigation released on Thursday.

The EPA announcement has major implications for a vast increase in gas drilling across North America in recent years.

Fracking has played a large role in opening up many Canadian natural gas reserves, but questions have been raised about the practice from northern British Columbia to New Brunswick.

"The public is more involved than ever in trying to understand what's going on with resource development, and we have to do a better job of explaining what's going on underneath the ground, what the resource looks like and how we operate," said Travis Davies, who is with the Canadian Association of Petroleum Producers. With files from The Associated Press

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Push for climate deal hinges on U.S., China

The United States, China and India could scuttle attempts to save the only treaty governing global warming, Europe's top negotiator said Friday hours before a 194-nation U.N. climate conference was to close.

After two weeks of negotiations, talks went through the night Thursday with delegates struggling to keep Durban from becoming the graveyard of the 1997 Kyoto Protocol on global warming.

"If there is no further movement from what I have seen until 4 o'clock this morning, then I must say I don't think that there will be a deal in Durban," said Connie Hedegaard, the European commissioner for climate action.

The proposed package would see the European Union extend its commitments to reduce greenhouse gas emissions under the 1997 Kyoto Protocol, but only if all other countries agree to negotiate a new treaty with legally binding obligations for everyone, not just the wealthy Kyoto group.

The EU has said it will not renew its emissions reduction pledges, which expire in one year, without agreement to begin work on a treaty to replace the Kyoto accord that would compel all countries to control their emissions, including the United States and China, which are the world's two largest polluters. The U.S. never ratified the protocol, though it has made voluntary efforts to reduce emissions.

The Europeans won critical support late Thursday from an alliance of small islands and the world's poorest countries — about 120 nations altogether — for its proposal to start negotiations now on a deal to take effect in 2018 or possibly after 2020. Brazil and South Africa also said they would accept binding emissions limits under a new agreement. The two countries are among the countries in the so-called developing world that emit the most greenhouse gases.

Ministers or senior negotiators from 28 countries then worked late through the night to try to bring the U.S., China and India on board.

Hedegaard said the three countries are still not on board and could scuttle the deal.

A man dressed as a tree holds a fake U.S. dollar note as he protests during a climate change conference in Durban, Dec. 8. Schalk van Zuydam/AP Photo Both China and the U.S. have said they would be amenable to the EU proposal to negotiate a post-2020 agreement, but each attached riders that appeared to hobble prospects for unanimous acceptance.

Canada has said it is prepared to sign a comprehensive treaty as early as 2015 but will not be part of any extension of the Kyoto approach to cutting carbon emissions.

The United States, whose Congress is generally seen as hostile on the climate issue, is concerned about conceding any competitive business advantage to China. Beijing, too, is resisting the notion that it has become a developed country on par with the U.S. or Europe, saying it still has hundreds of millions of impoverished people.

Rich countries are legally bound to reduce carbon emissions while developing countries take voluntary actions.

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$9B Joslyn oilsands project gets green light

Minister of Natural Resources Joe Oliver says Alberta's Joslyn North mine project has been approved. Sean Kilpatrick/Canadian Press

Natural Resources Minister Joe Oliver says Canada's environmental review process takes too long and it should be streamlined so it doesn't last any longer than two years.

Oliver made the statement in announcing federal approval for French oil giant Total's Joslyn North oilsands mine project 65 kilometres northwest of Fort McMurray, Alta.

"I think the regulatory process should be completed within a reasonable amount of time and that time should be a couple of years," said Oliver.

It took six years for Total to get environmental approval for the project, which faced opposition from environmental groups. Oliver said that was unacceptable, but didn't offer specific suggestions on how to shorten the process.

Oliver told reporters the mine could bring as much as $9 billion in new investment in Canada. Total says the project will create thousands of jobs.

The opposition wasn't impressed with Oliver's statements about the environmental assessment process.

"You can wave a wand and say you are going to drop it from six [years] to four to two. Well, why not one? Why not not have it? Why not six months? If you think you know what the predestined outcome of the process is going to be, then why have the process?" asked MP David McGuinty, the Liberals' natural resources critic.

The Joslyn project is slated to be up and running at full production by 2017.

At full capacity, it will produce 100,000 barrels of bitumen a day. Total estimates are that the mine will yield more than 874 million barrels over its 20-year lifespan.

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Dollar falls on Europe worries

The Canadian dollar fell by more than a cent Thursday on disappointment that the European Central Bank has no plans for large-scale government bond purchases, to help drive down the borrowing costs of deeply-indebted eurozone members.

The loonie closed down 1.19 cents at 97.79 cents US.

Markets also dropped ahead of a crucial summit of European Union leaders in Brussels Friday which is aiming to find a convincing solution to the European debt crisis.

The S&P/TSX composite index tumbled 196.94 points, or 1.6 per cent, to 11,951.79.

In New York, the Dow Jones industrials were off 198.67 points, or 1.63 per cent, at 11,997.70, the Nasdaq composite index dropping 52.83 points, or 1.99 per cent, t0 2,596.38 and the S&P 500 index stepping back 26.66 points, or 2.11 per cent, at 1,234.35.

"People are very nervous that Europe will yet again fail to adequately address the sovereign debt crisis," says David Kelly, chief market strategist for JP Morgan Funds in New York.

S&P/TSX 3-month chart

Traders had been hoping for a bond-purchase program, but the ECB has been vocal in maintaining it does not want to be seen as the lender of last resort.

"The ECB doesn't want to fall into the trap where they are just always expected to come to the rescue," said Gareth Watson, vice-president investment management and research at Richardson GMP Ltd.

"This is just kind of tough love and unfortunately tough love does not work out so well in the marketplace."

The January crude contract on the New York Mercantile Exchange closed down $2.15 to $98.34 US a barrel and February gold dropped $31.40 to $1,713.40 US an ounce.

European bourses also shed early gains with London's FTSE 100 closing down 1.14 per cent, Frankfurt's DAX declining two per cent and the Paris CAC 40 dropping 2.53 per cent.

With files from The Canadian Press

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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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