Bank of Canada deputy governor Carolyn Wilkins speaking says:
- High global debt makes Canada, rest of world vulnerable to another period of financial instability;
- Trade war between u.s. and China, growing geopolitical unrest are top of mind for bank; rising global debt "concerns me the most";
- "No one gains and everyone loses" in trade wars; end to u.s. tariffs on steel and aluminum would be a welcome relief;
- Global financial system in a better place than in 2007, but uncertainties like trade tensions could "throw us off track"; high leverage an amplifying factor;
- High household debt is "our number one domestic financial vulnerability"; Canada does not have same debt quality issues that u.s. had before 2008 crisis;
- Public debt in certain euro area countries a concern, those with weak fundamentals more prone to distress;
- US. and Japan make up largest share of public debt in advanced economies, but their debt poses less of a worry;
- Non-financial corporate debt poses a financial stability risk for China, could flow to Canada through lower demand for exports, lower commodity prices, turbulence to global financial markets;
- Investment funds, exchange-traded funds a concern because "we don't know how these funds will react when an adverse shock hits";
- Me needs to be done to stress test new players in the system, including asset managers and non-bank financial institutions;
- China taking action on more stringent regulation, financial sector supervision, but trade conflict makes "delicate balancing act" for authorities tougher;
- A stable debt-to-gdp ratio does not guarantee financial stability; credible macroeconomic framework critical to maintaining faith in government creditworthiness, achieving growth.
"Rising global debt is slowing economic growth and making Canada, and the rest of the world, more vulnerable to another period of financial instability, Bank of Canada senior deputy governor Carolyn Wilkins said on Thursday.
Speaking to an audience of financial professionals and students in Vancouver, she noted that while the global financial system is in a better place than it was a decade ago, trade uncertainties and other geopolitical risks could throw things off track.
"Global debt now totals around $240 trillion - that's $100 trillion higher than just before the financial crisis," Wilkins said, adding: "That is a headwind to growth and makes us vulnerable to another period of financial instability."
The Bank of Canada - which has hiked rates five times since July 2017 - stayed on the sidelines in its rate decision last week, warning there was "increased uncertainty" on the timing of future hikes and removing wording around the need for rates to rise to the neutral range over time.
The more dovish tone prompted money markets to price in the chance of a rate cut by year-end, with that probability hovering around 35 percent ahead of Wilkins speech. Wilkins did not mention the need for further rate hikes."
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