Euro Leaders Agree on Growth Plan

On Friday, the leaders of Germany, France, Italy and Spain vowed measures worth up to 130 billion euros to try to revive economic growth in Europe but differed over whether and how to launch joint bonds to combat the euro zone’s debt crisis.

The measures include a capital injection for the European Investment Bank, the redirection of some unspent EU regional funds and “project bonds” to finance infrastructure works.

German Chancellor Angela Merkel, head of Europe’s most powerful economy and the main contributor to its rescue funds, endorsed the growth package but did not address the issue of mutualising past euro zone debt or new borrowing.

France has been pressing Germany to accept the idea of Eurobonds — mutualising the bloc’s sovereign debt — but Berlin has fiercely resisted.

Spanish Finance Minister Luis De Guindos said on Friday the country would make a formal request for Eurozone aid for its banks next week.  Madrid said they need up to 62 billion eurosto survive a financial crisis.

 

Ottawa Tightens Mortgage Rules

On Thursday, Finance Minister Jim Flaherty announced further adjustments to the rules for government-backed insured mortgages.  These are mortgages with loan-to-value ratios of more than 80 per cent; in other words a down payment below 20%.  The four new measures are:

  1. Reduce the maximum amortization period to 25 years from 30 years. The maximum amortization period was set at 35 years in 2008 and further reduced to 30 years in 2011.
  2. Lower the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent of the value of their homes
  3. Fix the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent.  The GDS/TDS were previously both fixed at 44 percent and the GDS was unlimited for those with high credit scores.
  4. Limit the availability of government-backed insured mortgages to homes with a purchase price of less than $1 million

The first and fourth changes are the most impactful.  A $300,000 mortgage with a 30 year amortization at 4 per cent would cost $1,426 a month to pay back. That same mortgage amortized over only 25 years increases the monthly payment by $152 or 10 per cent to $1,578 a month.

According to the Canadian Association of Accredited Mortgage Professionals, about 40 per cent of all new mortgages were amortized over 30 years last year.

The new cap on government backed insurance means that home buyers will have to come up with a 20% down payment on any home value exceeding $1 million dollars.

Minister Flaherty said the new rules will take effect on July 9, 2012.

 

Oil Hits 8-month Low

By early afternoon in Europe, the August contract for crude was up 33 cents to US$78.53 a barrel in electronic trading on the New York Mercantile Exchange. On Thursday, the contract had reached US$78.20, the lowest since October.

Crude fell from $84 earlier this week and has plummeted 26% in less than two months as signs mount of a slowdown in the global economy, led by Europe that would reduce demand for crude.

 

Market Recap (as of June 22nd)

  • The TSX closed at 11,435 down 0.78% for the week. YTD the TSX is down 11.9%
  • The DOW closed at 12,640 down 0.99% for the week. YTD the DOW is up 3.5%
  • The S&P 500 closed at 1,335 down 0.58% for the week.  YTD the S&P 500 is up 6.2%
  • Oil finished at 80.15 down 5.81% for the week. YTD oil is down 18.90%
  • Gold finished at 1,573, down 3.49% for the week. YTD Gold is up 0.38%
  • The CAD/USD finished at $97.60

Sources: Marketwatch, Bloomberg, Advisor.ca