Canada’s High Debt Crisis Risk Drops Significantly

Photo by Michelle Spollen on Unsplash

No need to panic. Canada is no longer at severe risk of a financial crisis. In fact, the country’s risk level has dropped significantly in the past year, according to a quarterly review by Bank for International Settlements (BIS).

BIS, an international financial institution owned by central banks, looks at countries’ credit-to-GDP gap in order to determine their exposure to a banking crisis. A country’s economy is at a greater risk if their private-sector debt exceeds its long-term trend.

READ: Canadians Get Honest About Financial Infidelity

Ten per cent is the “critical threshold” at which a financial crisis could suddenly occur. In 2018, Canada’s credit-to-GDP gap was 4.7 per cent, HuffPost Canada reports. The country was previously the second most at-risk country, behind China. Now, Canada sits in ninth place.

Hong Kong, Turkey, and Switzerland are currently flagged as the top three countries heading towards a crisis. Argentina and Japan round out the top five.

In the past few years, Canada was pegged as one of the top five countries at most risk of a crisis due to its debt levelsHuffPost Canada reports, so BIS’ latest data is a good sign.

READ: Canadian Household Debt Has Slowed Considerably In The Past 36 Years

The Bank of Canada (BoC) also argues that the outlook might be better than BIS makes it seem. This is because BIS also takes into account the debt of Crown corporations (which are backed by the government), which increases Canada’s private-sector debt. Thus, Canada’s risk of a financial crisis might not actually be as high as reported, BoC noted in a 2017 report.

The slowdown of household debt can be linked to the lowered risk of a financial crisis. Fewer Canadians are taking on mortgages as a result of rising interest rates and the mortgage stress test, which has lowered the number of people falling into debt.

READ: What You Need To Know About The Mortgage Stress Test In 2019

The growth of Canada’s household debt is now at its slowest pace since 1983, but that doesn’t mean Canadians don’t have financial struggles. In a survey from December, 31 per cent of Canadians said they don’t make enough money to pay their bills or their debt.

Additionally, a 2019 Household Debt Survey found one-in-five Canadians will need to liquidate assets in order to pay down or pay off their debt this year. This includes selling a car, getting a second mortgage and so on.

READ: High Levels Of Household Debt Could Spell Disaster For Toronto and Vancouver

“Budgeting and debt are inexorably linked,” CEO Laurie Campbell, of Credit Canada, who conducted the survey, said. “There’s no better time than ‘budget month’ for people to take a step back and holistically review their finances, housing costs and expenses – essentially, how much money is coming in versus how much is going out.”

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