Monday, June 8, 2009

Consolidating Debt: When is the Right Time?

I've heard a lot of people give advice about why you should consolidate debt. The reasons are obvious; to lower your overall interest cost and to improve cash flow. However, I've never heard anyone talk about when you should consolidate debt. I frequently get calls from people experiencing some kind of financial difficulty who are thinking about taking out a mortgage. Trouble is, they’re already maxed out on their credit cards and in some cases they’ve started missing payments. The time to access funds is before you are maxed out on your credit cards -- avoid missing payments at all costs! Anytime you are more than 30 days late making a payment on anyone one of your credit cards, loans, etc. your lending institution will send the information to the credit bureau and your credit will become tarnished. Once your credit is tarnished it will be more difficult and more costly to get the funds you need. Therefore, the time to access mortgage funds is before you are maxed out and before you have started missing any payments!

BoC will shift gears on rates: Scotiabank

World economy 'has begun to turn the corner'

Eric Lam, Financial Post
Published: Friday, June 05, 2009


The Bank of Canada may not be able to live up to its promise to keep interest rates at a rock-bottom 0.25% until the end of June next year, the Bank of Nova Scotia said yesterday.

In an global forecast update yesterday, Warren Jestin, chief economist at the Bank of Nova Scotia, said Mark Carney, the central bank governor, will act when economic growth raises inflation concerns. BNS, previously one of the more bearish banks on Bay Street, also revised up its forecasts for growth.

"They'll have no trouble shifting gears," he said. "Once they see signs of recovery they won't be sitting on their hands."

Yesterday, Mr. Carney and the Bank of Canada repeated their plan to hold the overnight rate at 0.25% until June, 2010. The central bank made the unusual declaration at its last announcement in April, in an effort to help the economy recover from the worst global recession since the Second World War. There was one caveat: It was conditional on the inflation outlook.

"The Bank of Canada has become more pessimistic than we are," Mr. Jestin said. He predicts Canada's benchmark interest rate will hit 2% and the U. S. rate 2.5% by the end of 2010.

The slumping dollar and increasing U. S. bond yield rates will also force the Fed's hand, adding further pressure for Canada's central bank to raise its rates.

Mr. Jestin knows he has also raised a few eyebrows by predicting a global turnaround in 2010.

"It's not rocket science. I often describe it as throwing horseshoes in the fog," he said, acknowledging that his bank has been bearish on the economy since 2007.

However, there are structural signs that the world has "begun to turn the corner," particularly in the United States.

Investors are returning to the equities market, stimulus packages are working, and after the housing and auto markets have bottomed out there will be a bounce back for consumers.

"The U. S. and world economies are starting to fill the hole we dug between September and April," he said.

A projected 2.2% drop in GDP growth in Canada this year will give way to a 2.5% increase in 2010, while the United States will cancel out an expected 2.6% GDP loss in 2009 with 2.8% growth next year. The U. S. forecast is a full percentage point higher than the bank's previous projection.

However, Mr. Jestin cautioned that the breakthrough 2010 recovery would be followed by a long period of "muted" growth.

The U. S. GDP will be hard pressed to grow more than 2.5% per year until at least 2015, and Canada will not fare much better. Globally, annual GDP growth is expected to max out at about 3% to 3.5%.

Right now, world GDP is on track for a 2.7% drop in 2009, with Japan (-7.5% expected) and European countries the hardest hit.

Canada's $50-billion deficit is also a key stumbling block, but not at the level of our southern neighbour.

"The United States deficit of US$2-trillion is 13% of GDP. We're not even in the same ballpark," Mr. Jestin said. Even so, he expects Canada to run deficits for at least the next five years.

As well, much of Canada's success will be depend on the strength of the loonie.

Mr. Jestin said recent market musings of quantitative adjustments and currency interventions should remain just that.

"I lived through the earlier period when the Bank of Canada routinely made currency interventions, in the old days back in the 1970s," he said. "They found out very quickly the market has a lot more money than they do and that interventions are futile."

Mr. Jestin also predicts the price of a barrel of oil will hit US$75 in 2010.

erlam@nationalpost.com
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