European economy vulnerable to geo-political risks, risky lending, says Oliver

OTTAWA – Finance Minister Joe Oliver says developments in the Ukraine and Iraq are endangering the global financial and economic recovery, particularly in still fragile Europe.

The minister, who was nearing the conclusion of his trip to the United Kingdom, Germany and Poland, says he been alerted by Europeans about mounting risks.

He notes that the overall growth rate in Europe remains very low and the latest inflation reading was only 0.5 per cent.

“So there is a very real risk of deflation and the banking system is more fragile than we would like to see,” Oliver said Friday.

“In this environment additional external shocks can be quite dangerous,” he added, citing the political tensions in the Ukraine and strife in Iraq that has led to a spike in oil prices.

Despite unprecedented low interest rates, governments and companies are not investing, he says, and lenders have again started taking on risk in the search for yield.

He says the gap in yields among countries and companies with very different credit ratings have narrowed, which “suggests that lenders are taking on more risk than they have before.”

Oliver says Europeans are well aware of the challenges confronting them and that they will be discussed at the next G20 meeting in the fall.

Relative to Europe, Canada’s banking system is doing well, as is the economy overall, he said.

On Thursday, Canada’s financial system supervisor, however, expressed similar concerns about Canadian banks going out on the limb with risky loans.

“While underwriting practices may be good today, past experience suggests that it could become very tempting in the current environment for mortgage lenders and insurers to ease up under the enchanting lull of the siren song of market share,” Mark Zelmer of the Office of Superintendent of Financial Institutions told a housing conference.

Most analysts blame lax lending standards, particularly in the U.S. housing market, for the financial collapse of several American investment banks in 2008 that triggered the global recession.