Julian Beltrame, THE CANADIAN PRESS

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OTTAWA - The federal government is buying up $25 billion in residential mortgages to give Canada's chartered banks more cash for loans, but the effort shouldn't be considered a bailout similar to the U.S. government lifeline for Wall Street banks, the federal government and industry watchers said Friday.

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THE CANADIAN PRESS/Sean Kilpatrick

Finance Minister Jim Flaherty announced government measures aimed at stabilizing the country's troubled lending industry - measures he predicts will prod banks to further lower their lending rates.

"It's a huge stretch to look at it as a bailout - it's a helping hand," said Brad Smith, a banking analyst at Blackmont Capital, a Toronto brokerage.

The extraordinary measure announced by Finance Minister Jim Flaherty means the federal government and the Bank of Canada will have injected a whopping $45 billion in additional cash into the financial system in an effort to counteract the tight credit squeeze that has paralysed markets throughout the world.

On the campaign trail, Prime Minister Stephen Harper said the mortgage transfer is sensible and risk-free for taxpayers since the government is buying mortgages it already insures through the Canada Mortgage and Housing Corp.

"This is not a bailout of banks; this is a market transaction that will cost the government nothing," Harper said at a campaign rally.

"We are not going in and buying bad assets. What we are doing is simply exchanging assets that we already hold the insurance on. The issue here is not protecting the banks. The issue here is ensuring that there will be credit available from those banks to the wider borrowing public."

NDP Leader Jack Layton criticized the plan as a gift to the financial industry, a move that won't help ordinary consumers struggling to cope with a weaker economy and growing job insecurity.

"Now we learn that the banks are in the process of getting a multibillion (dollar) bailout from the government with no explanation," Layton said at a campaign stop in Toronto." Just out of the blue.

"It shows that Mr. Harper and his team are making this up as they to along."

Smith said the Flaherty announcement was a far cry from the US$700 billion government bailout designed to rescue the struggling U.S. financial sector. In that case, government is acquiring hundreds of billions of dollars of worthless mortgages from bank balance sheets, hoping to sell them at a profit in future when U.S. house prices recover.

"The word 'bailout' presumes so many things," he said. "It presumes success . . . it sounds like you give them (the money) and all the problems are gone."

Instead, he suggested the move was a way to accelerate mopping up some of the troubles that face the Canadian banks' balance sheets and get credit lending back to more normal levels.

Earlier Friday, Flaherty also insisted the government is not bailing out the banks, nor will Ottawa take on risky loans.

"This is going to make loans and mortgages more available and more affordable for ordinary Canadians and businesses."

Shortly after Flaherty's announcement, the big banks cut their prime lending rates by up to a quarter point, saying the mortgage buyout gave them billions more dollars on their balance sheets to lend to consumers and businesses. Earlier this week, they had refused to pass along a half point rate cut by the Bank of Canada because of turmoil in the credit markets.

Around the world, global banks and financial companies are dealing with toxic mortgage assets on their books, which cut capital reserves and squeeze their ability to issue new loans.

Flaherty's announcement was widely considered as a way to free up extra capital for the Canadian banks and encourage new consumer and corporate loans, which could stimulate the domestic economy.

The minister insisted that Canada is not facing the severity of problems seen in many industrialized countries, but he is acting before the same problems develop in Canada's money markets.

"This is a serious, severe, protracted freezing of credit markets globally," he said.

"Unlike some other countries we are being proactive. We are taking this step now to avoid a situation where there would be a lack of availability of mortgage loans, a lack of availability of business loans."

He said the government stands to make a small profit from the mortgages because government borrowing costs are lower than what the assets will yield in interest.

The move came as Statistics Canada reported the economy had created 107,000 new jobs in September, although most were of the part-time variety and concentrated among youth.

The minister said the additional liquidity may also provide an added benefit for Canadians, boosting consumer spending and business investment in the economy.

Flaherty said the auction will be handled by the Canada Mortgage and Housing Corp. starting next week and that Ottawa will be holding most of the mortgages to maturity in five years.

"As insured mortgage pools in Canada already carry government backing, there is no additional risk to taxpayers," he said.

The purchase represents about three per cent of the total outstanding residential mortgages in Canada.

Tsur Somerville, a business professor at the University of British Columbia, said the mortgage transfer announced by Flaherty is not a bailout since the loans are already ensured by a government agency.

"If they went into default then the government would have to bail them out anyhow," he said. "What they've done is essentially replaced mortgages with cash which changes the capital requirements of the banks."

Earlier this week, the World Economic Forum issued a report that described Canada's banking system as the world's strongest.

-With files from David Friend