Royal Bank expert says bankers in this country figuring out who faces most risk
Michael Kane
Sun
The U.S. sub-prime mortgage fiasco is already squeezing borrowers in Canada as bankers struggle to determine which lenders are exposed to the greatest risk, RBC chief economist Craig Wright said Monday.
But while a recession in the U.S. is possible as a result of the lending crisis, it is not considered probable, Wright told the Vancouver Board of Trade.
He said the dramatic slowdown in the U.S. housing market is being offset by strong growth in American trade as a result of the weakening greenback.
And in Canada, the relatively strong Canadian dollar is helping productivity, since about three-quarters of our machinery and equipment is imported from the U.S.
Tougher lending standards arising out of the sub-prime crisis — in which American consumers could get mortgages with no income, no job and no assets — are more of an issue in the U.S. than Canada, Wright said in an interview.
“Credit is still available, but it is probably going to be done at different pricing — a little higher — and on different terms,” he said.
“The sub-prime market is $1 billion, but it is only a small piece of the mortgage market and it is a very small piece of the overall credit market.
“The problem is knowing where this exposure has been held and that’s what everybody is trying to get through.”
On the gloomy side, he told the board, one U.K. hedge fund manager has likened the sub-prime crisis to fishing with dynamite. The small fish float to the surface first, and then the big ones come up later.
Alternatively, there is the view that derivatives spread risk across the globe, so that everybody shares a bit of the pain but not everybody feels all the pain.
“Others like Warren Buffett hold that derivatives are financial weapons of mass destruction. So he’s obviously more bearish. The wild card is the banking sector is based on confidence and trust and [that’s] quite strained right now after a long period of over-confidence.”
Wright said the economies of Canada and B.C. are being helped by a long period of strong global growth but could be hit by “friendly fire” if the U.S. resorts to protectionist measures as a result of a weak dollar and a weak economy in an election year.
Given the fiscal freedom enjoyed by both the federal and B.C. governments as the result of surpluses, he called for corporate tax relief to help firms adjust to recent shocks such as U.S. weakness and Canadian dollar strength.
“Canada is pretty close to average on personal taxes relative to other OECD countries, whereas we’re quite high on the corporate side,” he said.
RBC Financial is predicting economic growth of about 3.0 per cent this year and next in B.C., down from a peak of 4.5 per cent in 2005 and a little more than 3.0 per cent last year.
“It will still be fairly strong growth but we’re looking for some moderation in the housing sector and probably some slowing down in the remarkable employment growth in the province,” he said.
“That’s probably not a bad news story because it will mitigate any inflationary pressures that are building on the wage side.”
Wright said RBC is sticking to its 2003 assessment that the 2010 Winter Games will add about one per cent to B.C. economic growth each year between 2005 and 2011.
© The Vancouver Sun 2007