If Canada were to fall into a recession, highly-indebted corporations would be in trouble, says former Bank of Canada governor David Dodge.
“Our very important firms have loaded themselves up on debt,” Dodge, now senior advisor at Bennett Jones, said in a television interview with BNN Bloomberg Friday. “So they will not be in a position to get through.”
Dodge’s comments come after Royal Bank of Canada forecast Friday that Canada will fall into a recession later this year as the economy is weighed down by the impact of COVID-19 and the plunge in oil prices.
The bank predicted Canada's economy will grow at an annualized pace of 0.8 per cent in the first quarter, but then contract in the second and third quarters of the year.
“There is a hole being created as this virus moves through the economic system,” Dodge said. “And it is the job of central banks to ensure the system remains liquid and functioning.”
However, Dodge sees an underlying problem in credit markets, noting that when credit seizes up, it forces banks to reconsider whether they have the room to take on more risk and more lending.
“The central banks have to keep the system moving,” he said. “But they also have to try to keep credit flowing to bridge industries over this period where they won’t have cash flow.”
While Dodge expected equity markets to take a hit amid the turmoil, he is more concerned about the state of highly-indebted corporations and high-yield bond markets.
“This is very much the job that now, in terms of industrial side, the federal government has to worry about,” he said.
“The question that remains is whether the government will provide loan guarantees to these critical sectors to enable them to get through.”
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