Friday , 10 July 2020

Canada Hits Two Critical Warning Signs For A Financial Crisis

The Bank for International Settlements (BIS), an international banking organization that serves as awarning3 bank for central banks, is flashing warning indicators for Canada. The warning signs mean that debt has reached critical levels, and will likely result in a financial crisis.

The comments above & below are edited ([ ]) and abridged (…) excerpts from the original article by Daniel Wong (

Credit-to-GDP Gap Breaches Critical Level In Canada

The credit-to-GDP gap has reached a critical level in Canada. The BIS defines this as the “difference of the credit-to-GDP ratio from its trend.” That’s bankster for “it compares credit consumption to the output of the economy.” If the level is too high, the amount of private credit is “unjustified.” The lower the number, the more credit can be “safely” consumed.

BIS considers anything above 2 to be a strong gap, and anything above 10 to be a critical warning. Breaching 10 results in a banking crisis in two-thirds of economies, within three years. Currently Canada is sitting at 14.1, the only G7 country to breach this level…Also worth noting that the BIS has also flagged Canada for a property price gap above critical level. This could complicate the credit-to-GDP gap even further.

Canada Hits Two Critical Warning Signs For A Financial Crisis - BIS Chart

Source: BIS.

Debt Service Ratio Will Hit A Critical Level If Rates Rise To “Normal” In Canada

The debt service ratio (DSR) of Canada, China and Hong Kong are throwing warning signs if, and when, interest rates return to normal. (A DSR is a term economists use to determine the ratio of debt payments a country will be making, compared to the country’s export earnings. It covers principal and interest payments. If the level is too high, it makes it hard for an economy to grow…since people are devoting a high amount of money to stuff they already bought.)

BIS modeled a 250 basis point rise in interest rates which would send the economies of Hong Kong, China, and Canada above the critical warning threshold – to 11.1, 8.8, and 7.6 respectively. The organization claims that when this warning threshold is breached, two-thirds of countries face a banking crisis within two years.

Canada, China, and Hong Kong are the only economies that have issues with both their credit-to-GDP gap, and their debt-service-ratios if rates rise. China is actively trying to crack down on high amounts of leverage, even at major financial institutions but Canada and Hong Kong, not so much.

Two-thirds of countries experience a banking crisis, eh?

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