Blogs & Comment

Credit crunch, Canadian style?

A recent Deloitte studyhas issued some warnings about the level of indebtedness in Canada. Here are the main points:
Canadians are now more indebted than Americans. The debt-to-disposable-income ratio in Canada currently stands at 132%, higher than the U.S ratio of 122%, according to Bank of Canada data cited by Deloitte. Canada has pulled ahead because U.S. indebtedness has fallen against disposable income since mid-2007 while Canadas continues to rise.
Many Canadian credit-card issuers loosened standards in recent years. Their credit card balances have increased almost 40% since 2004.
Deloittes survey of credit-card executives in Canada revealed a 5% to 10% jump in delinquencies beginning last fall which translates into annualized industry losses of more than $800 million (at the upper end).
Credit-card companies in Canada have traditionally seen loss rates of less than 4% a figure much lower than that of their American counterparts (6% and growing), but with Canadian consumers increasing their debt-to-disposable-income ratios to more than 130%, Canadian issuers could see losses similar to those of their U.S. counterparts, warns the Deloitte study
Financial institutions see credit-card losses as the canary in the coal mine. In Canada customers will likely default first on cards rather than on mortgages or car payments. This is converse to what has been happening in the U.S. where fairly lax mortgage default legislation has meant that people have been walking away from their houses before they have missed payments on their credit cards.