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Canada’s Catch-22: Bankruptcies Could Soar If Economy Improves

Canada’s Catch-22: Bankruptcies Could Soar If Economy Improves.

There is a Catch-22 in Canada’s economy, which is this: When things get good again, it will cause things to go bad.

That’s because Canadians have taken on so much debt that a rise in interest rates could tip many borrowers at the margins into insolvency.

Many market observers expect interest rates in Canada and the U.S. to start rising next year, with the U.S. Federal Reserve leading the way as the U.S. economy enjoys a widespread recovery.

CIBC economist Benjamin Tal issued a report last week noting that interest rates typically rise when the economy improves, so bankruptcies tend to come down when interest rates go up.

But after five years of rock-bottom interest rates, Canadians have taken on record levels of debt that have pushed house prices to record highs and spurred large increases in auto sales.

That makes Canadian consumers very sensitive to changes in interest rates. “We might see bankruptcies rising alongside interest rates,” Tal concluded.

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