Showing posts with label Toronto-Dominion Bank. Show all posts
Showing posts with label Toronto-Dominion Bank. Show all posts

Analysis: What Canada’s debt crisis in the ’90s can and can’t teach the U.S.

Postcard of the Dominion Bank building on the ...Image via WikipediaBy Randall Palmer and John McCrank
OTTAWA/TORONTO — Canada has some lessons for the United States in terms of slashing deficits and winning top tier ratings back, but there are deep differences between the two countries in terms of what might work.
The Liberal government won broad political support for its efforts to cut the deficit in the decade after its first international ratings downgrade in 1992, but the United States faces deep political divisions about how to respond.
Ottawa’s chosen route back to surplus involved both spending cuts and tax hikes, in a ratio of roughly seven to one. The budget was balanced within six years, and Canada won its prized AAA rating back within a decade.
“You basically have to grasp the nettle,” Paul Martin, the finance minister at the time, told Reuters in an interview. “Fundamentally, you have to have an end game, you have to take immediate action.”
Martin, also a former prime minister, said he was confident the United States could balance its budget, but it would need tax hikes as well as spending cuts.
“The actions have to be primarily on cutting expenditures, but the fact is that you cannot do it unless everybody is willing to come to the party, and if you eliminate tax increases… you’re never going to make it.”
Tough advice also came from Monte Solberg, who was finance critic for the conservative opposition Reform Party during Martin’s deficit-cutting years.
In a display of inter-party co-operation that’s rare outside wartime, Reform backed the Liberals as they cut the deficit, ushering in an era where it became political suicide for a federal Canadian politician even to talk about running a deficit.
“If you don’t make the cuts now in things like some of the big entitlement programs, then those programs themselves will have to be cut much more deeply in the future and the pain will be much deeper,” Solberg, whose now-defunct Reform Party has small-government parallels with the U.S. Tea Party, said of the U.S. budget mess.
“So better do it now — it’s the old saying, you can’t dock the dog’s tail an inch at a time. You should just do the job, get it done, face up to the pain and in the end you’ll be better off.”
Canada’s headaches with international rating agencies started in 1992 as first Standard & Poor’s and then Moody’s (in 1994) lowered its debt ratings, alarmed about rising public debt levels along with concern that a separatist movement in French-speaking Quebec could tear the country apart.
The Wall Street Journal rubbed salt in the wounds, with a January 1995 editorial that called Canada “an honorary member of the Third World.” With Canada’s debt-to-GDP ratio heading for a record 72 percent, the moniker stung. The budget cuts were painful — health care was hit especially hard — but the political will never faltered.
“I think it’s interesting that in terms of the Canadian experience, the fiscal rebalancing was done by a Liberal government, so it shows that you don’t need to be on the far right of the political spectrum to get government cuts and fiscal rebalancing,” said Craig Alexander, chief economist at Toronto-Dominion Bank, Canada’s second largest.
“Even though it didn’t fit with the government’s ideology it actually embarked on very serious fiscal tightening. They put together a long-term plan as to how they were going to rebalance the finances of the country and then they delivered and executed on that plan, and I think that’s the message for the United States.”
But there are many reasons the Canadian model won’t work for Washington right now, including the political deadlock, the vast burden on U.S. government spending from the hard-to-cut military complex, and the fact that the overall world economy is in far more fragile shape than it was in the 1990s, when the United States also ran a budget surplus.
“We’re recovering from a global credit market meltdown, a Great Recession The U.S. has been at war for more than 10 years, so the economic fundamentals are far different, and so the accumulated deficits that the U.S. has on its balance sheet will be difficult to address by economic growth,” said Queen’s University finance professor Louis Gagnon.
“There doesn’t seem to be any clear line of sight towards a balanced budget. We’re seeing trillion-dollar deficits for almost as far at the eye can see.”
The U.S. budget deficit has soared to $1.4 trillion or 9 percent of GDP. Canada’s deficit never climbed above 6 percent of GDP, a more manageable number.
Moody’s Investor Services, whose 1995 second downgrade of Canada was often seen as the low point in the country’s budgetary problems, said Ottawa’s evangelistic approach to not running up a deficit had been a factor in the agency’s decision to give back the AAA rating in May 2002.
“We were convinced that the debt reduction program was going to continue over the medium term because there was a political consensus on that. We believed that no matter which major party was in power, that they would continue with that,” said Steven Hess, lead analyst for the United States and Canada at Moody’s.
“Just as a peculiarity, among the 16 countries that we have rated triple A, the U.S. is the only one that doesn’t have a parliamentary system. Now whether that’s good or bad is a subject for discussion, I’m not opining one way or the other, just pointing it out.”
© 2011 Thomson Reuters

Evaluating Canada's Economy

RBC Branch HWY 404 & HWY 7 260 East Beaver Cre...Image via Wikipedia
anada is America’s largest trading partner. The reasons Canada has come out of the 2008-2009 recession virtually unscathed is murky to most Canadians and all Americans. Some of it was dumb luck and/or the holding back on innovations.

Space limitation allows for a thumbnail sketch only of the differences in style of business in Canada vis-a-vis the United States.

Banking Industry

Canada’s five major banks, with thousands of branches, pleaded with the government to be allowed to merge, evolve into 2 or 3 multibillion dollar banks able to underwrite big deals, big enough to match Wall Street’s behemoths. The government said, "No, you’re likely to close unproductive branches in rural areas." The banks tried to con the finance minister, claimed they would keep all branches open. The federals wouldn’t budge. The banks got lucky.

Royal Bank of Canada, Toronto Dominion, and CIBC went into the U.S. market anyway. CIBC got badly burned in the Enron fiasco where it settled with the SEC for $1 billion dollars. RBC and TD have had better luck, with TD expanding with commercial branches in the northeast and southern United States.

The Housing Market

There doesn't seem to have been a single foreclosure in Canada. Prices are still rising in some locations, dipping in others. In the United States, folks don’t care to build up equity since mortgage interest is tax deductable. Furthermore, availability of a 30-year mortgage allows one to get by with minuscule amounts of principle being paid. When home prices rose, the tendency was to apply for a second mortgage treating one’s home like an ATM machine. In Canada, to buy a home, a substantial down payment is required, and credit worthiness is a prerequisite. One is offered a fixed rate (amortized over 20 years) mortgage for up to five years only. Interest is not deductable. The mortgage is insured for a small fee by the Canadian Housing Authority and is held by the issuing bank to maturity. All in all, it was an old fashioned way of doing business.

Living Standard

A little known fact is that, in Canada, a good three-quarters of the population is middle class. While per capita income is lower than the United States, the social safety net, including the National Health Plan, offsets the difference. The fabricated stories of mistreatment, waiting periods, death panels, and more, are just that: malicious rumours spread by those interested in maintaining the U.S. status quo. What puzzles many visitors to Canada is an absence of slums.


A good many Americans from above the Mason Dixon line retire, and establish permanent residence in the sunbelt. Naturally, Medicare services in such locales are strained, increasing costs. Canadians who wish to avail themselves of the Health Plan stay at home. There is no sunbelt to retire to, and no trailer parks. The benefit of this lower mobility is more stable home prices and adequate medical staffing.

Immigration and Government

Major cities in Canada, (about six), are a polyglot of nationalities. There are no racially segregated areas in Canadian cities, just segregation by housing costs. There is little friction, perhaps because, with the exception of some parts of the Maritimes, Canada is a country of immigrants. Canada does not have a land border with an underdeveloped country. Illegal immigrants that get in, usually by air, can apply for asylum. While they wait for an immigration panel to adjudicate their case, they are free to find work and obtain some subsidy, if needed. A costly affair, but it does provide for peaceful society.

In the recent era, governments of all political stripes, to stave off defeat in a vote of confidence, which brings on an election, managed Canada's affairs from the center. The current right-wing, minority government is no different. Partisanship is mostly rhetoric. A law passed by the House of Commons (component of Canadian government of elected officials) gets an easy pass from the unelected Senate. There is little drama, and few surprises.

By: Manny Drukier
Source: The Epoch Times

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