Debt Splash or Tsunami

The financial services sector is being pressed to defer mortgage and loan payments, and to advance more credit to households and businesses. At the same time the Federal government is providing relief programs that will be funded entirely through government debt. The Bank of Canada is buying up additional tranches of debt financing (“Backstopping” markets), like other central banks. The present will be funded by the future.

In aggregate, the level of debt – private and government debt – is reaching enormous heights. The trend is one that spans years, and the Covid-19 crisis has created a new surge.

source: ceicdata.com

The Federal government debt is now estimated at @C$1.3T. Provincial government debt follows a a similar long term trend with a total @C$0.8T. That Federal government debt will almost certainly grow by at least 10% in the near future.

The Minister of Finance prefers to talk about the debt to GDP ratio. Federal government debt has been 30-35% of GDP in recent years. He carefully ignores the other debt trends. However, this year the denominator will decrease and the numerator will increase. That ratio will jump up. Still, Canada’s ratio will remain low compared to many other developed countries.

The comfort we may take in Canada’s relative position for government debt if offset by the levels of debt accumulating elsewhere. This debt has substituted for government debt in recent years, to provide economic stimulus.

Growing household debt levels have been a source of concern to the Bank of Canada, Canada Student debt is up sharply, and corporate debt is up. Canada Student Loans (direct) were $62M in 2001, and were $2197M in 2018. Corporate debt as a % of GDP is the is near the top of G20 countries (only China and France top Canada).

In effect, we have been riding a debt bubble for some time. Recent events will provide a bump, as we add debt to government, households and business. But one has to ask if it can just go on?

Lenders are conflicted. Loans generate revenue. Consumer purchases stoke the economy. But, at some level, debt service costs can burden a household, and leave too little money for necessities, living expenses and, as we have seen recently, savings. (Unfortunately, low interest rates obscure these realities.)

It may be too easy for credit unions to ride the wave of consumer (and SME) loan demand without due caution. Member-consumers and financial intermediaries will likely suffer.

The Financial Consumer Agency of Canada surveyed households last year:

On average, Canadian household debt represented 177% of disposable income in 2019, up from 168% in 2018 (Statistics Canada, 2019). Results from the 2019 survey indicate that nearly three quarters of Canadians (73.2%) have some type of outstanding debt or used a payday loan at some point over the past 12 months (see also Statistics Canada, 2017). Almost one third (31%) believe they have too much debt.

The FCAC reports that @50% of households do not have savings for emergencies sufficient to cover three month’s living expenses.

This current crisis has made it clear that many Canadians are over-extended, with too much debt and too little set aside for for emergencies. This can be traced back to easy access to credit; to buy things that are not needed, to vacation on credit cards, and to mortgage to the hilt.

Credit unions are the institutions created by neighbours to help neighbours. They need to champion the responsible use of credit, and help households better control their spending. Credit unions also have to more emphatically encourage saving plans, and also promote financial literacy. ‘Thrift’ may be the way to prepare for a rainy day.

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