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Warning bells are sounding; more Canadian bankruptcies are expected

Canada’s bankruptcy professionals are expecting more bankruptcies next year as the nation’s consumers continue to amass debt.

“In a report issued this week, the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), which represents 90 per cent of Canada’s licensed insolvency trustees, said bankruptcies among Canadian households are set to spike starting in 2019,” Daniel Tencer of The Huffington Post reports.

Given that the Bank of Canada started its current round of interest rate hikes in mid-2017, CAIRP expects the fallout to hit next year, Tencer wrote. And since rates have kept going up steadily since then, bankruptcies will continue to rise into 2020 and possibly beyond, said CAIRP chair Chantal Gingras.

“Rising interest rates coupled with a near record-high consumer debt-to-income ratio will force more Canadians into insolvency,” she told HuffPost Canada in an interview.

Among CAIRP’s membership, 97 per cent expect insolvencies to rise next year. Ninety per cent say Canadians “possess unhealthy levels of debt.”

Stephen S. Poloz, Governor of the Bank of Canada, spoke about Canada’s bankruptcy problem last May to the Yellowknife Chamber of Commerce.

“The amount of debt held by Canadian households has been rising for about 30 years, not just in absolute terms but also relative to the size of the economy. At the end of last year, Canadian households owed just over $2 trillion. Mortgages make up almost three-quarters of this debt,” he said.

“While debt is indispensable for our modern way of life, it has been a growing preoccupation for the Bank of Canada for several years now,” Poloz added. “That is because high debt levels can make us vulnerable to negative events—individuals as well the entire economy.”

But it’s just not consumers who are taking on massive debt. Governments in Canada are also trying to live way beyond their means. A headline in The Financial Post a year ago put it in perspective.

“Canada’s economic growth has come at a price — its debt level is now highest in the developed world,” the headline read. The subheadline told the rest of the story: “Economic growth has coincided with Canadians and their various levels of government taking on substantial debt”

“Canadians have managed to become global leaders in indebtedness, according to the Organization for Economic Co-operation and Development,” Geoff Zochodne wrote. “Canada stands out in the report, which noted that the country’s debt has “continued to rise from high levels.”

“Canada’s credit to households for the fourth quarter of 2016 was ahead of all other major economies, including China and the United States, standing at 101 per cent of gross domestic product,” Zochodne’s report continues. “This may not bode well for Canada and other countries carrying high levels of debt, the report suggested.

“Indebtedness of households and non-financial corporations in many advanced and emerging market economies is high. In many countries, it is continuing to rise,” the report said. “Highly indebted countries may be vulnerable to financial and real shocks, and such indebtedness may undermine the sustainability of growth in the medium term.”

Canada’s banks are also feeling the effects of the consumer debt problem.

The headline on a BNN Bloomberg report reads: “Canada’s banks facing great threat from consumer debt: Moody’s”

“Canada’s mountain of consumer debt is triggering multiple alarms about the threat to the country’s banks,” wrote Maciej Onoszko of Bloomberg News.

“Moody’s Investors Service joined the Bank for International Settlements and S&P Global Ratings which have all warned in the last month that Canada’s banking system, dominated by five giants, is facing a growing threat of souring consumer loans amid rising interest rates,” the writer continues. “The country’s ratio of household debt to disposable income reached a record 171 per cent in the third quarter of last year.

“The proportion of uninsured mortgages has increased to 60 per cent from 50 per cent five years ago, including home equity lines of credit, amid government efforts to reduce taxpayer exposure, according to the report from Moody’s. Canada Mortgage and Housing Corp., a government agency, insurers the bulk of mortgages in Canada.”

So brace yourself Canada. It appears more bankruptcies are on the way.

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Jeff Wilkinson

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Jeff Wilkinson

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