Federal action to ease credit crunch at home garnering positive response
Published Wednesday November 12th, 2008
TORONTO - Finance Minister Jim Flaherty boosted Ottawa's efforts to ease the credit crunch Wednesday in a series of measures aimed at enticing Canadian banks to loosen their purse strings and extend more lending to businesses and consumers.
Ottawa will triple the amount of insured mortgages it will be able to buy from banks and make it cheaper for banks to use government insurance that guarantees borrowing, Flaherty announced from his office in Toronto.
Economists praised the measures, which they said will reduce the pressure on banks and help consumers gain greater access to credit.
The moves are expected to give banks access to a large pool of cash, or liquidity, which will help insulate them from the crisis that has hit global money markets.
Around the world, banks have been reluctant to lend to each other and to consumers and companies, making it more difficult to stimulate spending and get troubled economies going again.
"The best we can do is try to deal with the indirect effects on our financial system, and I think the Canadian government is doing exactly that," said Craig Alexander, vice-president and deputy chief economist at TD Bank.
"The government actions are aimed at helping Canadian financial institutions weather the storm."
Under the new measures, the federal goverment will be able to buy $75 billion in residential mortgages by the end of the fiscal year, up from $25 billion when Flaherty introduced the plan last month.
The plan is meant to take billions of dollars in mortgages off the books of Canada's big banks, which would then give them the financial capacity under current regulations to lend more money for consumer and student loans, lines of credit and corporate loans to help stimulate spending and economic growth in the flagging economy.
"Adding to it is a very positive thing because it isn't going to cost the Canadian taxpayer a single cent, the government of Canada runs a profit, and it helps Canadian banks get access to reasonable cost financing," said Alexander.
A credit crunch caused by the Wall Street financial meltdown and growing weakness in the global banking system has been blamed for a sudden freeze in lending, making it more difficult for people to borrow money to buy a car, or companies to get fresh loans to finance trade and purchase new equipment.
Gregory said the measures being implemented in Canada pale compared to the action that's been taken in the United States and Europe, where banks have been bailed out and taken over by governments - partly because Canada's banking system has stayed fairly robust.
"Global issues fall on our shore and they have, and we're paying the price for banks around the world. The thing is, though, the price we're going to pay is a lot less," he said.
"Canadians can relish in the fact (other) people are going to be a lot worse than us."
Flaherty stressed that the mortgages are already insured through the Canada Mortgage and Housing Corp., a federal Crown corporation.
"It is an efficient, cost-effective and safe way to support lending in Canada at a time of extraordinary strain in global credit markets," he said ahead of a roundtable with economists.
The move will help average Canadians by making "consumer and mortgage loans more affordable and more available," he said.
Michael Gregory, senior economist at BMO Capital Markets, said the measures will impact the bottom line for consumers.
"They will pay lower interest rates than they otherwise would have, simply because banks don't have to borrow in the open markets and pay up for that and pass that on to consumers," he said.
Flaherty also announced that Ottawa would reduce the cost of using government insurance that guarantees bank borrowing.
The Canadian Lenders Assurance Facility, announced last month, offers insurance on wholesale term borrowing that banks need to fund operations and make credit available to Canadian households and businesses.
The base commercial pricing of the facility will be reduced by a quarter percentage point, Flaherty said Wednesday. The government will also waive the quarter point across-the-board surcharge for insurance provided under the program "until further notice."
Banks weren't keen to use the program, but that may change now that Ottawa has made it more competitive, Alexander said.
"The existing pricing was too expensive," he said.
"And you can see that by the fact there wasn't any significant take up in the previous offer."
In another move aimed at helping small to medium-sized businesses gain access to credit, Industry Minister Tony Clement announced that Ottawa would increase the borrowing authority of the Business Development Bank of Canada.
It raises the BDC's borrowing authority limit to $11.5 billion from $9.7 billion, he said.
In another development Wednesday, the Bank of Canada says it will inject an additional $8 billion into the country's tight money markets under new liberal terms.
The bank says the new Canadian-dollar term loan facility will be conducted in four auctions of $2 billion each over the next few weeks.
Qualifying financial institutions will be able to offer non-mortgage loans as collateral, meaning they can offer most loans currently on their books.
Meanwhile, Flaherty also warned that Ottawa may have to post a deficit next fiscal year. The government is on track to run a small surplus this year, but 2009 will be more challenging, he said.
"The key is to manage the fiscal fundamentals of the government as carefully as we can, in the interest of Canadian families and individuals and businesses, so that may mean that we would run a deficit next year," he told a conference of economists later in the morning.
Instead of manipulating numbers in an attempt to engineer a small surplus for next year, Flaherty stressed the government's priority is to avoid a "structural deficit."
"The key is ... that we will have a floor and will be clear about not going below that in order to ensure that as the economy recovers we come out of deficit."
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