TSX, loonie slide

Attention has been focused on the 17 countries that use the euro but the debt crisis has implications for economies around the world, including among the members of the European Union that have their own currencies.

“People are very nervous that Europe will yet again fail to adequately address the sovereign debt crisis,” says David Kelly, chief market strategist for JP Morgan Funds in New York.

The TSX Venture Exchange dropped 21.83 points to 1,517.38.

The Canadian dollar lost 1.19 cents to 97.79 cents US as traders moved back to the safe haven status of U.S. Treasuries.

New York markets also fell heavily with the Dow Jones industrials down 198.67 points to 11,997.7. The Nasdaq composite index dropped 52.83 points to 2,596.38 and the S&P 500 index stepped back 26.66 points to 1,234.35.

Markets had interpreted comments from Draghi last week as meaning that the ECB was preparing to ramp up its purchases of European government bonds if governments could agree on tighter spending oversight. But on Thursday he said the bank had no explicit plan to do so and was “surprised” by the way his remarks had been interpreted.

Traders had been counting on the EU summit, due to start Thursday night, to produce a fix for the European debt crisis through closer budget controls among the 17 euro countries to ensure another debt crisis doesn’t happen.

Large-scale bond purchases would help drive down government borrowing costs, which have risen to crippling levels in Italy and Spain, Europe’s third- and fourth-largest economies.

There’s a danger they will follow the path of Greece, which required a second bailout after its cost of borrowing rose above sustainable levels.

By stabilizing the finances of Europe’s governments, the ECB would strengthen the continent’s financial system. European commercial banks that own government bonds face potentially huge losses and, as a result, they have curtailed lending to each other and consumers. That credit squeeze is felt globally.

However, the ECB has been vocal in maintaining it does not want to be seen as the lender of last resort.

“The ECB doesn’t want to fall into the trap where they are just always expected to come to the rescue,” said Gareth Watson, vice-president investment management and research at Richardson GMP Ltd.

“This is just kind of tough love and unfortunately tough love does not work out so well in the marketplace.”

Draghi’s remarks sent borrowing costs soaring for Italy, Spain and other countries with heavy debt burdens.

The yield on the benchmark 10-year Italian government bond jumped more than half a percentage point to almost 6.5%. The yield on Spain’s 10-year bond rose one-third of a percentage point to 5.71%.

There had been initial positive sentiment after the ECB announced it has cut its key interest rate by a quarter percentage point to one per cent.

Many economists think many parts of Europe are heading for a recession. A slowing economy would only make it harder for European governments to pay down debt.

But fears of another recession extend far beyond Europe. Contracting economies would lower demand for oil, copper, coal and many of the resources Canada produces. That would weaken exports and squeeze profits, in turn eroding a main driver of rising share prices on the TSX.

The TSX financial sector was a major decliner, down almost 1.5% with Royal Bank (TSX:RY) down 76 cents to $48.81 while Bank of Montreal (TSX:BMO) lost 84 cents to $56.31.

National Bank (TSX:NA) wrapped up a string of earnings reports from the Canadian banks Thursday by posting a profit increase of two per cent to $294 million while revenue increased to $1.19 billion. National also boosted its quarterly dividend by four cents to 75 cents per share. Its shares gained 61 cents to $67.03.

Resource stocks were also lower as commodity prices lost early momentum with the January crude contract on the New York Mercantile Exchange down $2.15 to US$98.34 a barrel on renewed demand concerns. The higher U.S. dollar also pressured commodity prices.

A stronger greenback usually helps depress oil prices, which are denominated in dollars, as it makes oil more expensive for holders of other currencies.

The energy sector fell 2.5% as Talisman Energy (TSX:TLM) lost 72 cents to $12.54 while Canadian Natural Resources (TSX:CNQ) fell $1.17 to $37.08.

Ottawa has given the green light for construction to start on Total E&P Canada’s Joslyn North oilsands mine 70 kilometres north of Fort McMurray, Alta. Suncor Energy Inc. (TSX:SU) picked up a minority interest in Joslyn through a $1.75-billion deal with the French-owned E&P late last year but its shares were caught up in the general market malaise and were down 97 cents to $29.54.

The base metal group backed off 3.55% while March copper on the Nymex was down six cents to US$3.50 a pound. Teck Resources (TSX:TCK.B) shed $1.40 to $37.36 while Ivanhoe Mines (TSX:IVN) lost 94 cents to $21.78.

Gold stocks also racked up losses. Barrick Gold (TSX:ABX) faded 96 cents to $50.82 while Goldcorp Inc. (TSX:G) lost 89 cents to $51.65 as February gold fell $31.40 to US$1,713.40 an ounce.

European bourses also shed early gains with London’s FTSE 100 down 1.14%, Frankfurt’s DAX declined 2.01% and the Paris CAC 40 dropped 2.53%.

Elsewhere on the corporate front, BCE Inc. (TSX:BCE) said Thursday it was upping its annual dividend by five per cent to $2.17 per share for 2012 and its shares were up 42 cents to $40.60.

Canadian Oil Sands Ltd. (TSX:COS) announced Thursday it will spend $1.46 billion on its stake in the Syncrude oil project in 2012. Its shares slipped 19 cents to $20.16.