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Is The Next Domino To Fall.... Canada?

Tyler Durden's picture


While two short months ago, "nobody" had any idea that Italy's banks were on the verge of insolvency, despite that the information was staring them in the face (or was being explicitly cautioned at by Zero Hedge days before Italian CDS blew out and Intesa became the whipping boy of the evil shorts), by now this is common knowledge and is the direct reason for why the FTSE MIB has two choices on a daily basis: break... or halt constituent stocks indefinitely. That this weakness is now spreading to France and other European countries is also all too clear. After all, if one were to be told that a bank has a Tangible Common Equity ratio of under 2%, the logical response would be that said bank is a goner. Yet both Credit Agricole and Deutsche Bank are precisely there (1.41% and 1.92% respectively), and both happen to have total "assets" which amount to roughly the size of their host country GDPs, ergo why Europe can not allow its insolvent banks to face reality or the world would end (at least in the immortal stuttered words of one Hank Paulson). So yes, we know that both French and soon German CDS will be far, far wider as the idiotic market finally grasps what we have been saying for two years: that you can't have your cake and eat it, or said otherwise, that when you onboard corporate risk to the sovereign, someone has to pay the piper. Yet there is one place where that has not happened so far; there is one place that has been very much insulated from the whipping of the market, and one place where banks are potentially in just as bad a shape as anywhere else in Europe. That place is.... Canada.

As the chart below shows, which is a ranking of global banks by tangible common equity, lowest first, of the banks with a TCE ratio of under ~4% a whopping 30% are those situated in Canada, the same place where nobody thinks anything can go wrong, and which has been completely spared from the retribution of the bond vigilantes. Something tells us Canadian sovereign CDS, not to mention Canadian bank CDS, are both about to go quite a bit wider...

h/t Geoffrey Batt


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Thu, 08/18/2011 - 21:07 | 1575406 FranSix
FranSix's picture

In the last depression, Canada was very hard hit.  According to Galbraith, the truth of the matter was that Canada fared poorly compared to the U.S.  I can't imagine it being any different.  Canada has higher structural unemployment than the U.S., presumably due to its resource based economy.

Canada had a surplus prior to ABCP, which was raided out of its employment insurance fund.  I am certain that Canada will be obliged to raid pensions like in so many other western nations.  And right after signing on to huge weapons deals and prison construction mandates.

Canadians like to pretend they're conservatives, when they're merely casting their vote in favour of their housing price asset appreciation.  Luckily for the banks, this will cause the greatest transfer of wealth from the taxpayer to the banks in Canadian history once the housing bubble collapses and the too-big-to-fail banks are propped up by the central bank.

What did Canadians spend their money on, using their housing equity as an ATM besides home renovations?

The excesses of legerdemain are the same for Canadian banks as they are for banks elsewhere.  Its not just a matter of ratios, balances, etc, etc, but how low interest rates are going.  Once interest rates go below 0.5%, then this is a point of no return.  Canadian interest rates based on the T-Bill are declining and have only weeks before this occurs.

Possibly the same scenario will unfold as it has in Switzerland, where the currency has gained near parity with the Euro and negative interest rates  likely become policy.

Remember we haven't had negative policy rates in the U.S. as of yet, but once that occurs, no more swap lines.

Thu, 08/18/2011 - 21:54 | 1575599 wang (not verified)
wang's picture

Canadians home equity as ATM



Canada is not Cape Coral nor like any of the other sand cities

though many here in America desperately wish to project their misery to our northern neighbor the comparison just does not hold water


Fri, 08/19/2011 - 18:40 | 1579358 Starving Artist
Starving Artist's picture

No?  Well that's just, like, your opinion, man.

Canadian household debt to income now around 150%

Canada's central bank moves in lockstep with the Fed regardless of local conditions. Dropping rates to zero goosed an already overheated market.  We're a lot further away from the mean than the USA.

Also note our max fixed-rate mortgage is 5 years.  Where will interest rates be in 2015 do you think?

“The very source of Canada’s relative success during the worst of the credit crunch — a banking sector that kept on lending and households that kept on buying — could yet spell its undoing if newly enlarged household debt loads prove too onerous to bear,” Mr. Lascelles says in a report issued Tuesday.

Further, he adds: “There is a popular misconception that the Bank of Canada cannot afford to raise interest rates because this would prove too damaging for mortgage holders. The opposite is in fact true. The reality is that the Bank of Canada cannot afford to delay raising interest rates, for precisely the same reason. The longer the bank delays, the more marginal borrowers will enter the market and be walloped when rates rise, and the further home prices will go above their equilibrium levels, only to tumble later.”


Fri, 08/19/2011 - 09:18 | 1576731 AcidRastaHead
AcidRastaHead's picture

Banks Smanks, when there is a run on The Beer Store, then you'll see real panic.

Fri, 08/19/2011 - 10:17 | 1576992 Rat King
Rat King's picture

Tyler, getting some press in our National newspaper!

Fri, 08/19/2011 - 10:43 | 1577205 somaplease
somaplease's picture

lol - welcome to the Globe and it's sheep!

Silver Bitchez!

Fri, 08/19/2011 - 14:47 | 1578378 somaplease
somaplease's picture

Great - now Huff Post has this on it's front page. 



Sat, 08/20/2011 - 18:00 | 1582118 bigredmachine
bigredmachine's picture

lol. phantom preachers of doom and gloom. keep your bullshit to yourselves. 

Sun, 08/21/2011 - 02:02 | 1583006 magnetic_silver...
magnetic_silver_ideas's picture

BNN Canada attacks ZeroHedge.. video here


Fri, 09/16/2011 - 17:29 | 1678706 polak potrafi
polak potrafi's picture

...trafnie przewidziec przyszlosc.


Dear Friends


At the time when everything goes south, those who can shall head up North. It will happen sooner or LATER, so don't keep your hopes high on 2 to 1 on CAD/USD yet (jeez, how I love math: CAD/USD=2/1=2 - two bucks for a looney - preposterous!!!).


But we need to be cautious. This may be NOT our story. And not even the story of our children - but the grand-kids. There is no need to apply any kind of stress. It should be enough to wait. Like the spider in the web. The South is the land of opportunity that we need. There is plenty of time to set the ground for the shift.

Fri, 12/16/2011 - 00:25 | 1986021 billsykes
billsykes's picture

didn't we do more bailout per capital than the usa?

aren't Canadians levered 150%+ with personal debt

in Canada its just o&g, mining and lumber the last 2 don't make money.

in Canada there is almost a zero tech sector

-very little manufacturing

and the stuff that does make money, oil & Gas is being bought almost every day by the Chinese totally unchecked by the govt.



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