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### Viewing cable 09OTTAWA321, Canada tries to keep credit markets open as foreign bankers

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
09OTTAWA321 | 2009-04-29 17:07 | 2011-04-28 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Ottawa

`

    VZCZCXRO2377
    PP RUEHGA RUEHHA RUEHMT RUEHQU RUEHVC
    DE RUEHOT #0321/01 1191707
    ZNR UUUUU ZZH
    P 291707Z APR 09
    FM AMEMBASSY OTTAWA
    TO RUEHC/SECSTATE WASHDC PRIORITY 9370
    INFO RHEHAAA/WHITE HOUSE WASHDC
    RUEAIIA/CIA WASHDC
    RHEHNSC/NSC WASHDC
    RUCPDOC/USDOC WASHDC
    RUEATRS/DEPT OF TREASURY WASHDC
    RUEHME/AMEMBASSY MEXICO 1960
    RUCNCAN/ALL CANADIAN POSTS COLLECTIVE

` `

    UNCLAS SECTION 01 OF 02 OTTAWA 000321

    SENSITIVE
    SIPDIS

    STATE FOR E, EB/DCT, WHA/EX, WHA/CAN

    STATE PASS USTR (SULLIVAN)

    COMMERCE FOR ITA/MAC (WORD)

    TREASURY FOR IA (WEYER)

    E.O. 12958: N/A
    TAGS: ECON EFIN ETRD EINV EIND PREL PGOV CA
    SUBJECT: Canada tries to keep credit markets open as foreign bankers
    rebuild

    Ref:   Ottawa 116

    SENSITIVE BUT UNCLASSIFIED.  PLEASE PROTECT ACCORDINGLY

    ¶1.  SBU) Summary: The traditional conservatism of the Canadian
    banking sector helped it avoid some of the damage suffered in other
    G-7 countries during the international financial crisis.  Canada's
    banks have had fewer toxic assets to deal with and much higher
    capital reserve requirements.  However, the relative strength of the
    Canadian banking system can do little to expedite an economic
    recovery that relies on events outside its borders. As Canada waits
    for international capital flows to improve, the central bank and
    finance ministry are implementing temporary measures to bridge the
    gaps left by the exodus of foreign banks and investors.  The current
    challenge for Canadian authorities, however, is how to keep credit
    flowing even as they try to prevent dependence on government lending
    and minimize inflation caused by expansionary monetary policy.
    Recent actions by the Bank of Canada and the government to lower
    interest rates, institute temporary credit facilities, and introduce
    alternative monetary policy instruments suggest that Canadian
    economic officials are hoping for recovery but are prepared for
    further difficulties.   End Summary

    Canada's spring economic report card
    ------------------------------------

    ¶2.  (U) In February 2009, Bank of Canada Governor Mark Carney
    predicted that Canada would experience a short and shallow economic
    recession (reftel) even as Canadian economists outside of government
    were making much more pessimistic forecasts.  Ottawa watchers
    speculated at the time that the Governor was trying to boost market
    confidence with a "glass half full" approach that would bolster the
    government's new stimulus and recovery plan.

    ¶3.  (U) By April 23, however, the Bank of Canada had revised its
    outlook with a somber Monetary Policy Report that scaled-back
    predictions of relatively quick Canadian recovery.  The April report
    states that monetary and fiscal policy remediation actions underway
    across the G-20 have been slow to take effect.  Given Canada's
    dependence on external markets and investment, the Bank of Canada
    now expects the Canadian economy to shrink by 3.0 percent in 2009
    (not 1.2 percent as earlier predicted), followed by 2.5 percent
    growth in 2010 and 4.7 percent in 2011.

    Interest rate reductions
    ------------------------

    ¶4.  (U) On April 21, the Bank lowered its benchmark overnight
    lending rate by one-quarter of a percentage point to 0.25 percent -
    the effective lower bound for the benchmark rate.  The Bank expects
    to hold the 0.25 overnight rate until the end of the second quarter
    of 2010 in order to achieve its 2 percent core inflation target.
    Since December 2007, the Bank has cut its benchmark rate by 425
    basis points.

    Quantitative easing and credit easing
    -------------------------------------

    ¶5.  (U) With the overnight lending rate technically as low as it can
    go, the Bank has raised the possibility of quantitative easing as an
    another monetary stimulus tool.  The Bank is concerned that even
    with a 0.25 percent overnight rate, private financial institutions
    will continue to charge inordinately high interest rates to
    consumers and businesses.  Quantitative easing would involve the
    Qconsumers and businesses.  Quantitative easing would involve the
    purchase of government securities by the Bank of Canada with the aim
    of increasing the money supply and demand for other financial
    assets.  The purchases would boost bank reserves and free up more
    cash for the banks to lend, the Bank hopes. (Another alternative
    monetary policy tool under consideration is credit easing, which
    would involve the purchase of private sector assets by the Bank of
    Canada.  Such credit easing would be used to help reduce risk
    premiums, improve liquidity, and stimulate credit flows.  With
    credit easing, the monetary base would remain unchanged and it is
    less likely than quantitative easing to exert inflationary

    OTTAWA 00000321  002 OF 002

    pressures.)

    ¶6.  (U) While the Bank of Canada has yet to use quantitative or
    credit easing measures, the government's January 2009 budget
    included approximately $164 billion in new credit easing initiatives
    for businesses and consumers -- mostly deployed through governmental
    financial entities.  The government has also created an important
    source of temporary credit by allowing non-exporters to tap into the
    Export Development Corporation (EDC) for the next two years.  In
    late 2008, the government injected $287 million cash into EDC, and
    the Corporation is expected to ask Ottawa to approve an increase in
    their bond-funded borrowing program from $4.9 billion to $6.6
    billion.  Other credit-easing measures under consideration include
    allowing banks to enter the lucrative auto leasing market and
    reforms to consumer credit, such as rate ceilings and improved
    consumer disclosure.

    The effects of the global financial crisis on Canada
    --------------------------------------------- -------

    ¶7.  (SBU) In April 23 public comments, Bank of Canada Governor
    Carney stated that his earlier, optimistic economic predictions had
    been predicated on significant reforms in U.S., European, and Asian
    financial centers. Carney stated that the muted progress in
    re-organizing the global banking system and dealing with toxic
    assets has had "knock-on effects" in Canada and slowed down his
    country's recovery prospects.  Carney said, "The longer it takes to
    deal with these problems, the more complicated they get and the more
    serious they become."  Referring to the United States, Carney added,
    "We have had a number of conversations with the Federal Reserve and
    Treasury. The Geithner plans are comprehensive - the challenge is in
    implementation but we know that they are seized with the initiative.
    We and others are looking forward to progress." (Comment:  It should
    also be noted that Canada's relatively high capital reserve
    requirements for its banks are having the unintended consequence of
    restraining lending even to blue-chip domestic borrowers.  This is
    because of a fall in the banks's asset values, which lowers the
    asset-to-lending ratio rather than because of a reduction in credit.
    End comment.)

    Planning for the morning after
    ------------------------------

    ¶8.  (SBU) Even as the Bank of Canada injects liquidity into the
    economy, Bank and federal officials have begun to focus on Canada's
    post-crisis economic health.  The Bank has been devising exit
    strategies to ensure that monetary stimulus does not cause undue
    inflation.  In order to prevent EDC funds from replacing private
    lending, the government is requiring non-exporters to prove that
    they were refused credit from private lenders.  Meanwhile, on the
    trade front, government bail-out funds (such as in the automotive
    sector) have been conditional upon industry restructuring to promote
    longer-term competitiveness.

`