Editorial: Eurodebt shockwaves to hit Canadians

Mid-January served up a good example of how downward lurches in the world’s sovereign debt crises don’t automatically translate into upswings in gold and silver prices.

Nine European countries – France, Italy, Cyprus, Portugal, Spain, Austria, Malta, Slovakia and Slovenia – all saw their credit ratings cut on Jan. 13 by bond-rating agency Standard & Poor’s, which maintains a “negative outlook” on 14 of the 16 eurozone sovereigns.

Only one country in the eurozone, Germany, retains a “AAA” rating by S&P, while at the other end of the spectrum, Greece has had its debt rating reduced to “CC,” or junk grade. S&P and fellow bond-rater Fitch say a Greek sovereign-bond default is now likely.

Bond markets shrugged off the downgrade news, with demand strong in a French debt auction only three days later. The euro was another story, however, with the currency falling sharply, pushing up the U.S. dollar and driving down the gold price by US$20 per oz. for a couple of days before it made up all its lost ground.

Still, the slightly longer view is much brighter for gold investors: spot gold prices in London are already up US$81.50 per oz., or 5.1%, since the end of 2011. Silver prices have followed the same pattern, and are up US$2.23 per oz., or 8%, since Dec. 30.

Most hard-core gold bugs posit that the euro will collapse under the strain of so many competing national priorities, though more mainstream analysts are of the view that Europe’s leading economy, Germany, remains an undisputed powerhouse and so, in the end, political accommodation will be made for the euro to evolve and survive.

The Bank of Canada says in its latest monetary report that the worsening global economy will hold back Canada’s economic growth to the tune of $10 billion, or 0.6%, primarily because the recession in Europe is “now expected to be deeper and longer than the bank had anticipated.” The bank adds that it “continues to assume that European authorities will implement sufficient measures to contain the crisis, although this assumption is clearly subject to downside risks.”

Broadly, the bank states that last year’s general shying away from risk-taking will morph this year into far greater restrictions in credit being made available to households and businesses in Europe and the U.S.

For Canada, that means weaker consumer and business confidence, lower commodity prices and challenging financial conditions. Total and core inflation rates are “expected to moderate in 2012 and subsequently rise,” reaching 2% by 2013’s third quarter.

At the personal level, Bank of Canada Governor Mark Carney laments the rising household debt among Canadians, which is now at a record 153% relative to disposable annual income.

Still, Canada comes off looking good compared to its European and American cousins: Canada’s economy grew 2.4% last year according to the bank, and it projects growth rates of 2% and 2.8% this year and next, respectively, and a return to full capacity in the second half of next year.

• At presstime, the Obama Administration’s State Department in the U.S. had officially turned down TransCanada’s proposed Keystone XL pipeline, which would have brought increased bitumen production from northern Alberta’s oilsands to refineries in Texas, which has growing excess capacity owing to long-term drop-offs in Mexican and Venezuelan crude production and imports.

TransCanada says it will reapply, having already spent some $2 billion on its proposal.

Anyone perusing Canada’s business newspapers knows that the Keystone setback has greatly intensified interest in building Enbridge’s even-more-contentious, proposed Northern Gateway oil pipeline from northern Alberta to Kitimat, B.C., in order to open up an alternate energy customer base in Asia.

Without the Keystone XL pipeline quickly in place, Canadian oil will continue to be sold for years to come in the U.S. heartland at a deep discount to world prices. That translates into many tens of billions of tax dollars lost to provincial and federal coffers in Canada in the coming decades – dwarfing the cost of building the XL pipeline – which is why politicians at both levels are suddenly so visible in this debate.

Opponents to Northern Gateway are organizing and growing in strength weekly, so that this year Gateway will undoubtedly become Canada’s number-one environmental battle.