Without critical food supplies in store before Arctic winter cuts off contact, the lives of 200 Canadian workers could have been jeopardized as an unintended consequence of the subprime debacle in the credit markets.
Baffinland Iron Mines Corp. sends annual supplies during the warmer months of the year by the route shown on the right. They pay for these with lines of credit. Those lines of credit dried up last week.
Bloomberg's Rob Delaney in Toronto explained it this way: "Sept. 25 (Bloomberg) -- Baffinland ran short of funds to pay for food, fuel and drilling equipment after investing in commercial paper that borrowers couldn't repay. Without the money, the company had to arrange an emergency line of credit before shipping lanes froze over.
`We have 200 people to keep alive,' Chief Executive Officer Gordon McCreary said in an interview in Toronto. `Our lifeline to getting critical materials to the north' was the C$43.8 million ($43.8 million) invested in commercial paper, he said." McCreary was able to arrange for interim financing, presumably at a higher interest rate.
"SO WHAT?" you may ask. Please read the next two paragraphs carefully. Unintended consequences can affect our livelihood as Lenders or Real Estate agents.
Asset-backed commercial paper has been as secure an investment as one could hope for, and companies worldwide "park" their cash in these instruments. That is, until the global credit crunch that we're experiencing right now. Rates on asset-backed commercial paper have not been this high since 2001, when New York's Twin Towers came down.
The benchmark for commercial paper interest rates is the London Interbank Offering Rate (LIBOR.) Mortgage lenders will recognize that as the Rate to which the majority of the 2/28 Adjustable Rate Mortgages are pegged. The LIBOR is moving steadily up.
The point of this story is this: There will be unintended consequences in local economies, and LOCAL REAL ESTATE VALUES will be affected. That's the Real Estate Opinion of this Tucson, Arizona Mortgage Lender.
You're right, Mike.
There are many manufacturing sectors being negatively affected here in Ontario, Canada since they shipped so many of their products to the USA.
Now with Americans having less discretionary dollar in their pocket, all of these sectors are suffering. It will affect the real estate market throughout Ontario, only not quite as drastically as it is affecting the American one.
I think it will take a few years for things to balance out again.....
Jo
Jo, thanks for commenting. Now that the Canadian dollar is on a par with the US dollar, I wonder if you folks up north will be buying US real estate at an increased rate?
Kris, thanks for visiting and commenting. I think it's only scary if we fail to take it seriously, and believe that our governments will bail us out. Today's news about the General Motors strike has me worried for Michigan's already shaky economy. We have kids and grandkids in Michigan.
Marlene, it's always good to see you visit and comment. Thank you!
Mike in Tucson
Mike, The Canadian dollar being at par is working out great for Americans ....thousands of Canadians are going south of the border to do their shopping (as long as they have their passport, a move that the Bush government made that put the kibosh on a lot of tourism dollars for Americans this past year... I know lots of Canadians who didn't travel to the USA, even though they used to every year before the passport law came into effect).
As for buying in the USA, I'm not so sure. I think they prefer to spend their real estate dollar here as prices here are quite a bit lower and the economy here is very good (which means their investment will continue to rise in value). Also, Southern Ontario is turning into the 'new Florida'...it stays pretty warm here now with global warming. Today is in the low 80s.
Jo (Mike, I had to edit this....I think the ones who were thinking of buying in the southern USA will be spurned into doing so now that the dollars are at par...good time to do it too !)