Harper taking action to backstop banks

By Julian Beltrame, The Canadian Press

OTTAWA - Prime Minister Stephen Harper signalled his government is preparing to take historic steps to shore up Canada's financial system as early as this week, but will stop short of buying into the banking sector.

The move comes as more indications emerged Wednesday that the financial crisis is far from resolved, including another massive selloff in North American stock markets and a report showing the American consumer has stopped buying.

Meanwhile, the leaders of the world largest economies - including Canada - have agreed to meet "in the near future" on the unfolding turmoil. Even before that G8 meeting, Harper said he will confer with French President Nicolas Sarkozy and European Commission president Jose Manuel Barroso in Quebec on Friday.

"We are going through a difficult time and Canadians are concerned. Their concerns are understandable," Harper told a post-election news conference in Calgary, declaring the economy is his top priority.

Analysts and industry insiders say the government is continuing to act to address a key issue in Canada that is a prerequisite in avoiding a recession - the ability of households and businesses to get credit to spur spending.

The government does not believe Canada's banking sector is as vulnerable as its global peers, but is concerned enough it has been put at a competitive disadvantage by recent aggressive bailout actions in Washington and Europe that it will announce new measures likely this week.

"We're looking at constantly what needs to be done to ensure the availability of credit for Canadians, Canadian businesses, families, individuals," the prime minister said.

"I won't go through the options we are looking at but let me just say the options we're looking at do not involve significant outlays of taxpayers money."

With the U.S. likely already in recession, the government is concerned that Canada may not be far behind especially if the tight money conditions restrict the ability of families to borrow for mortgages, or businesses to get credit for operations or expansion.

They have reason to be, said Avrim Lazar, president of the Forest Products Association of Canada.

"Obtaining credit is the number one issue for the next little while," he said. "Access to credit is like oxygen for business and everybody is gasping right now."

Canadian Banking Association chief executive Nancy Hughes Anthony said Canada's banks are solid and solvent, and there are no signs yet they are being disadvantaged by measures adopted elsewhere.

"But you can be as safe and sound as an institution as you can be, if you can't get any funding, that impairs your ability to lend out to you and me and other people who need mortgages," she added.

The government has ruled out directly investing in the banks because it is initially costly and there are no indications any Canadian bank is in danger of failing.

After agreeing to purchase $25 billion in mortgages held by banks last week - a move to free up bank capital for more loans - the government is now expected to announce it will increase the $100,000 deposit insurance to give large depositors confidence their savings are covered.

As well, Ottawa plans to backstop new bank debt, or inter-bank loans, so that Canadian institutions have equal access to funds in the tight global market.

Bank of Montreal economist Michael Gregory explained the measures make sense for Ottawa because it is unlikely it will have to follow through on any of the guarantees, particularly if the banking sector is indeed the world's strongest as the World Economic Forum determined.

Both measures go directly to the issue of competitive advantage with other banks, whose loans have been guaranteed by their governments.

"The fact the U.S. government is putting money into banks is not an issue because we're still in better shape, but the guarantees (of bank debt) do undermine our competitiveness," he explained.

The same reasoning applies to depositor insurance. He pointed out the United Kingdom was forced to guarantee all deposits once Ireland made the commitment because some large depositors began moving their money into the British subsidiaries of Irish banks.

TD Bank chief economist Don Drummond said he had yet to see signs that Canada's credit markets had eased as a result of steps taken so far.

In Brussels, European leaders said they were looking for a complete overhaul of global financial structures, including having the International Monetary Fund take a more active supervisory role in financial practices, to try and hold off a global recession and restore confidence.

The Conference Board of Canada in a new outlook said it does not expect Canada to fall into recession.

However, several economists, including Gregory and Derek Holt of Scotia Capital, have predicted a mild recession for Canada starting his quarter of 2008.

Recessionary fears were blamed for the large sell-off Wednesday, with the Toronto Stock Exchange's composite index losing 631.8 points and the key Dow Jones average on Wall Street tumbling 733 points, or almost eight per cent.

In a separate development Wednesday, the Investment Funds Institute of Canada reported that investors fled from mutual funds last month, leaving the industry with net redemptions of almost $4.5 billion - the most of any month on record.

That's be biggest shrinkage of asset value since a decline of 10.59 per cent in August 1998, amid the Russian ruble-devaluation crisis.

The uncertainty about credit, global stock markets and the impact on the economy has led Canadian businesses to urge government to look to the long-term as well as the short-term to fundamentally address weak points in the economy.

The Canadian Manufacturers and Exports said Wednesday a poll of 419 of chief executives called for a government action plan to boost productivity.

"We need Parliament to resume as soon as possible and we need an all-party consensus on a plan to boost investment in productive technologies, innovation, skills development, and public infrastructure," said CME president Jayson Myers.

The Forest Products Association called on the government to step-up targeted action on climate change.

Meanwhile, the Canadian Chamber of Commerce called for quick action on the economy and said the government may need to re-examine its spending to avoid a deficit next year as the economy slows down.

The busines lobby also said the Bank of Canada should cut interest rates another half percentage point at its rate-setting meeting next Tuesday and inject more cash into credit markets to make it easier for small businesses to borrow money.

In a letter to Harper sent Wednesday, the chamber also urged the Tories to consider insuring all bank deposits, regardless of size, to boost confidence and remain competitive with other countries. Denmark, Germany, Ireland and Hong Kong have already done so and the United States raised the deposit insurance cap.

"The well-being of every Canadian citizen depends on how quickly the new government addresses the current global economic turmoil," said Perrin Beatty, the chamber's president and CEO.

"Early action is essential, and many critical initiatives can be started immediately at little or no cost to the government."