BofC warns of more debt from COVID-19

The Bank of Canada says there are signs in the country’s financial markets that suggest concern about the ability of companies to weather the COVID-19 economic crisis.

The central bank has spent the last two months making a flurry of policy decisions that has seen it slash its target interest rate and embark on an unprecedented bond-buying program to ease the flow of credit.

The report suggests these measures have helped ease liquidity strains and provide easy access to short-term credit for companies and households.

But it warned Thursday that a cash-flow problem for businesses seeing sharp revenue declines during the crisis could soon develop into a solvency issue.

The Bank of Canada’s review of the country’s financial system says market prices point to a concern that defaults are likely to rise.

The report also raises concerns that household debt levels are likely to rise and become acute for households whose incomes don’t fully recover from the pandemic.

“We entered this global health crisis with a strong economy and resilient financial system. This will support the recovery,” bank governor Stephen Poloz is quoted as saying in the review.

“But we know that debt levels are going to rise, so the right combination of economic policies will be important, too.”

Aside from what is now approaching $150 billion in direct federal aid, the central bank over the course of March alone slashed its target interest rate to 0.25 per cent from 1.75 per cent.

It has also snapped up federal bonds to effectively provide low-cost financing to Ottawa to cover a massive spike in spending.

The bank’s balance sheet has more than tripled to $392 billion since early March, as part of an expansion larger and faster than during the financial crisis of 2008 and 2009 when its balance sheet increased by 50 per cent.

But the longer the economic shock from COVID-19 lasts, the more it drives the risks of consumer insolvencies, the central bank says.