Debt dominated business headlines in 2011 as U.S. politicians bickered over deficit reduction, earning the country an unprecedented ratings downgrade, and years of European borrowing turned the public purse into a public curse.

In Europe, even as the global recovery struggled for traction, governments cut spending, laid off public servants and raised taxes, often in return for international bailouts made necessary by the high cost of borrowing from banks.

The pain of austerity led to riots that reached their peak in June in Greece, and raised concerns about job losses and higher taxes derailing an already fragile global situation.

At the same time, dithering by European leaders about how to contain the crisis from spreading from the bailed-out economies of Greece, Ireland, Portugal to those of the too-big-to-save, such as Italy and Spain, raised bigger questions about the survival of the euro and the currency union of the 17 eurozone economies.

Back in October, financial markets soared when European Union leaders agreed to a plan to shore up weak banks and increase the firepower of their bailout fund, even though they failed to provide much detail about how the deal would work.  

Just five days later, however, everything was up in the air again as Greek Prime Minister Papandreou announced he would put the terms to a popular vote in a national referendum.

Three days afer that, the referendum idea was gone and then so was Papandreou, to be replaced by former European Central Bank vice-president Lucas Papademos.

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Mario Monti, shown in December, became Italian Prime Minister on November 16. Geert Vanden Wijngaert/Associated Press

The next leader to go, just three days later on November 12, was Italy's Silvio Berlusconi, replaced by another technocrat, former European commissioner Mario Monti.

By early December, it actually became newsworthy when France and Spain held successful bond auctions, selling the full amount of bonds on offer.

But, on  December 5, Standard and Poor's, the bond ratings agency, announced it was examining the long- and short-term credit ratings of 15 eurozone countries for a possible downgrade. That meant that within three months, there would be a 50 per cent chance of a ratings downgrade for any — or all — of the countries.

Only Cyprus and Greece weren’t included. Cyprus because it was already on credit watch, and Greece because S&P had already written it off as a basket case.

Three days later, S&P extended its warning to the debt of the European Union. This was just prior to yet another European summit on Dec. 9 at which 26 of the 27 members of the EU announced they had a deal to forge stronger ties between most of Europe's economies.

Of that group, all 17 nations that employ the euro as a common currency agreed to sign a treaty that allows a central European authority closer oversight of their budgets.

Nine other EU nations agreed to consider the treaty, with Britain being the lone holdout.

These EU leaders also agreed to lend the equivalent of $272 billion to the International Monetary Fund, to beef up its bailout capabilities. But top market watchers such as Canada's TD Economics warned that amount wouldn't be enough.

"Without more serious intervention by the European Central Bank to lower the bond yields of solvent but illiquid countries, the financial crisis in Europe will continue," TD economists reported.

Another credit rating agency, Moody's, appeared to feel the same way. On Dec. 12, it said the fiscal pact would not deter it from reconsidering the ratings of the 27 nations.

The concern about European debt prompted the Bank of Canada to focus on another problem of over-borrowing, that of Canadian households.

Household debt-to-income rose to a record 149 per cent in 2011, higher even than in the U.S.

That left the bank to warn that Canadian households could be vulnerable to a shock, should a financial crisis in Europe trigger a global slowdown and a sharp rise in unemployment or a significant decline in house prices, which would sap household wealth.  

Europe's debt crisis was not the only one that roiled markets.

Congress became deadlocked in a pre-election year drama over whether the U.S. government would be allowed to extend its $14.1-trillion borrowing limit.

The political haggling started dragging markets down after July 21, as investors wondered whether the politicians would actually push the government of the world’s biggest economy into default, and the turmoil dragged on until a deal was reached on July 31.

U.S. downgraded

The settlement didn’t prevent rating S&P, on Aug. 5, from stripping the U.S. government of its top-notch, triple-A rating, something it had enjoyed for 70 years. The agency said the agreement didn’t go far enough to show that Washington was getting its fiscal house in order.

An S&P official said there was a one-in-three chance of another downgrade within six to 24 months should the U.S. government fail to implement its Aug. 2 deficit-reduction plan.

The wrangle over the debt ceiling came amid growing concern about the tepid pace of the recovery in the U.S. The weakened economy led the U.S. Federal Reserve to make the unprecedented promise on Aug. 9 that it would not increase interest rates until 2013.

Despite this pledge, however, the S&P downgrade led to one of the year's biggest dips on the stock rollercoaster, culminating in 400-point drops by both the S&P/TSX Composite and Dow Jones Industrial Average on Aug. 18.

In the weeks prior to that drop, investors were "confronted by tortuous negotiations over a second bailout of Greece, then the needless spectacle of the U.S. debt ceiling high-wire act, then concerns over Italy, then the U.S. debt downgrade by S&P, and then concerns over France," grumbled BMO Capital Markets' Doug Porter.

The market turmoil, however, didn’t stop a deficit-busting congressional "supercommittee" from failing to agree by its Nov. 23 deadline on how to cut the U.S. budget deficit by $1.2 trillion over a number of years.

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The U.S. Congressional Joint Deficit Reduction Committee, otherwise known as the 'supercommittee,' failed to agree on how to cut the country's deficit by $1.5 trillion US. (Mark Wilson/Getty)

As a result, markets sold off again, with the TSX down by more than 250 points at one point during the session. The panel's failure is supposed to trigger about $1 trillion US in spending cuts to a wide range of domestic programs and the Pentagon budget, starting in 2013. But that of course will only begin after the next presidential and congressional elections in November.

Still, all this pre-election posturing in the U.S. appears to have sideswiped Canada directly on Nov. 10, when the Keystone XL oil pipeline proposed by Calgary-based TransCanada Corp was put on hold until 2013, after the State Department said it would extend the approval process.

The 2,736-kilometre pipeline would carry 700,000 barrels a day of mostly oilsands crude from Alberta to U.S. refineries on the coast of the Gulf of Mexico.

The State Department decision came after public concerns surfaced regarding the environmental sensitivities of the currently proposed route through the Sand Hills area of Nebraska. And some critics said the delay was motivated by President Barack Obama not wanting to alienate core Democratic voters on an environmentally sensitive issue before the 2012 election.

Subsequently, however, TransCanada agreed to reroute the pipeline around the Sand Hills area and congressional Republicans succeeded in pushing Obama toward making an earlier decision on the project, as part of the price of a temporary budget deal.

Central banks act together

While all this was going on, markets made a blazing comeback on Nov. 30 when, because of the growing unwillingness of global banks to lend to each other, the central banks of six countries, including Canada, said they would act together to offer unlimited and unsecured U.S. dollar loans to foreign central banks at favourable rates.

The S&P/TSX Composite Index closed higher by 472 points, or four per cent, to 12,204.17 and the Canadian dollar gained 0.95 of a cent to close at 98.01 US. The move by the six central banks was all in the hope of heading off the possibility of deflation, which they feared would lead to bank failures and more business closures.

Looking back, it was ironic that a year that ended with debt and deflation top of mind began with inflation as a main concern.

On Feb. 3, the UN Food and Agriculture Organization warned that global food prices had hit a 21-year high, from when the agency first started tracking in 1990.

Oil prices, already high at the beginning of the year, peaked in April at almost $114 US a barrel, as growing unrest in Libya raised concerns about supply.

Gold, which holds its value in times of inflation and uncertainty, began a run-up in March and peaked above $1,900 US an ounce in August, only to head down almost immediately afterward, ending the year at around $1,750.

OTHER BUSINESS MILESTONES IN 2011:

March 11:

A devastating earthquake and tsunami hit Japan and its economic impact rippled across the globe. Auto production in Ontario fell nearly 13 per cent in the four months after the disaster, compared with the same period in 2010, largely a reflection of the problems facing the Canadian subsidiaries of Japanese car makers.  It wasn’t until November that Honda Canada, for example, would see a year-over-year increase in sales.

May 16: 

A wildfire destroyed 40 per cent of Slave Lake, Alberta, the worst fire of several that temporarily shut down oil production and pipelines over the spring.

June 24:

Former media baron Conrad Black was resentenced to 42 months in prison on fraud and obstruction of justice charges, meaning he would serve up to 13 more months. The new decision came six years after he was originally charged with fraud in connection with the alleged looting of $80 million US from Hollinger International Inc., the newspaper empire he once controlled.

Aug. 26: 

The Ontario Securities Commission stopped all trading in Sino-Forest shares, alleging fraud at the TSX-listed Chinese forestry company.

Sept. 17:

The Occupy Wall Street protest against income disparity and corporate greed began in lower Manhattan. Over the coming weeks, similar protests would spring up across North America, Europe and Asia.

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A car burns in Rome on Oct. 15 as “Occupy Wall Street” protests spread to Europe and Asia. (Gregorio Borgia/Associated Press)

Oct. 5: 

Steve Jobs, whose resignation as CEO of Apple Inc. had been announced on Aug. 24, died of pancreatic cancer. Jobs, who forged Apple into a powerhouse and revolutionized how people listen to music and use computers through design, marketing and creation of personal computers and mobile devices, was 56.

Oct. 9:

Air Canada and its 6,800 flight attendants avoided a strike when the federal minister called in the Canadian Industrial Relations Board to help resolve their labour dispute through a binding process. It was the latest episode in a challenging year for the airline, featuring one strike, one near-strike, two interventions by federal ministers, two arbitration rulings and four rejected tentative contracts.

Oct. 11: 

Millions of users of Research in Motion’s BlackBerrys were left without data access worldwide for as long as four days after a so-called infrastructure problem knocked out service. That was just the latest in a slew of bad news for the Waterloo, Ont.-based company, including the announcement in June of layoffs to cut costs and a $485 million US charge in December for unsold Playbooks.

Dec. 2: 

Statistics Canada reported its second unemployment shocker in as many months, saying Canada lost 18,600 jobs in November, pushing the rate up to 7.4 per cent. Economists had been anticipating creation of between 16,000 and 17,000 jobs. The month earlier, the country had lost 54,000 jobs, when economists had been expecting the addition of 15,000.

With files from The Canadian Press and The Associated Press