Canada warns of "bumpy road" amid fiscal cliff talks

Fri Dec 14, 2012 1:57pm EST
 

OTTAWA (Reuters) - Failure to prevent the U.S. fiscal cliff of automatic tax hikes and spending cuts would affect Canadian growth and create uncertainty, Canadian Finance Minister Jim Flaherty said on Friday, adding that he had just spoken to U.S. Treasury Secretary Tim Geithner about the issue.

"The reality is there's more work to be done. We are in the middle of December. I think there's a desire by the Americans to get to a resolution, but we're in for a bit of a bumpy road and we need to fasten our seat belts," Flaherty told reporters.

Flaherty said his conversation with Geithner on Friday did not leave him any more pessimistic about the prospects for a deal in Washington to avoid the automatic tax hikes and spending cuts that could set back the U.S. economic recovery and hurt Canada.

"There's good reason for concern in the next quarter or so if that issue is not resolved satisfactorily between the U.S. administration and the U.S. Congress," Flaherty said.

"And that affects growth in the United States, which directly affects growth here, and it affects confidence and creates uncertainty, neither of which are desirable."

Flaherty said Standard & Poor's downgrade late Thursday of several Canadian banks was largely because of concerns about Canada's housing market.

S&P lowered its ratings one notch for several banks including National Bank of Canada (NA.TO: Quote), Laurentian Bank of Canada LB.TO and Bank of Nova Scotia (BNS.TO: Quote). The agency affirmed its ratings for Royal Bank of Canada (RY.TO: Quote) and Toronto Dominion Bank (TD.TO: Quote).

"I think the reassessments by S&P deal with the housing market and their concern with the housing market," Flaherty said. "Our financial institutions do issue mortgages and hold them, so there's some concern there which is why I have acted four times in the last four years to tighten the mortgage insurance market."

Canada's housing market is showing signs of cooling after a period of overheating characterized by soaring prices, rampant homebuilding and heavy demand for mortgages at ultra-low rates.

Flaherty said the government was hoping to avoid a "hard landing."

(Reporting by Louise Egan; Writing by Randall Palmer; Editing by Janet Guttsman and Andrea Ricci)

 
Canada's Finance Minister Jim Flaherty speaks during a news conference on Parliament Hill in Ottawa December 3, 2012. REUTERS/Blair Gable