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Canada takes action to prevent recession amid global financial crisis

Canada has increased its efforts to fortify its banking sector on Thursday, by offering loan guarantees to mitigate the impending impact of the global financial crisis, which is anticipated to push the country to the brink of recession. This measure aligns with similar multibillion-dollar programs adopted in the United States and Europe, aiming to restore confidence in lending markets after numerous Bank failures, primarily linked to investments in distressed U.S. mortgages.

Finance Minister Jim Flaherty emphasised the government’s commitment to preserving the competitiveness of Canadian financial institutions in global wholesale markets. Reuters quoted him as saying in a statement, “The government of Canada is acting today to ensure that financial institutions in this country are not put at a competitive disadvantage when raising funds in wholesale markets to lend to consumers and businesses.”

The global economic turbulence, which has rattled world markets and plummeted consumer confidence to historically low levels, is predicted to bring Canada’s economy dangerously close to recession, according to the Bank of Canada. In its quarterly report, the central bank projected a 0.4 per cent contraction in the fourth quarter of this year and zero growth in the first quarter of 2009, meeting the technical criteria for a recession, which entails two consecutive quarters of economic decline.

Bank of Canada Governor Mark Carney emphasised that while the economic outlook was sluggish, he refrained from characterising it as recessionary. Finance Minister Flaherty expressed optimism that a recession could still be averted.

To counterbalance the challenges, a substantial depreciation of the Canadian dollar may help offset the decline in commodities markets, benefiting manufacturers. Furthermore, the cumulative reduction of the bank’s key interest rate by 225 basis points since December of the previous year is expected to stimulate economic growth in the months to come, noted Carney. Canada’s relatively robust housing and banking sectors have positioned the country more favourably compared to other developed economies.

Despite meagre annual growth rates of 0.6 percent for 2008 and 2009, the central bank anticipates a robust recovery in 2010, with a growth rate of 3.4 percent. Carney expressed confidence in this recovery, highlighting that it is milder compared to recoveries following previous crises.

According to Reuters, Finance Minister Flaherty reasserted his commitment to maintaining the country’s 11th consecutive budget surplus for the current year. However, he cautioned that this might not be sustainable in the following years and did not rule out the possibility of providing additional economic stimulus, in addition to the previously announced tax cuts.

Global leaders are set to convene in Washington next month to address the deepening worldwide economic gloom, with European leaders calling for a comprehensive overhaul of global financial system regulations. The finance ministers of G20 nations will meet in Brazil before the Washington gathering, with Carney emphasising the need to establish a process for reforming the global financial system.

Canada’s program to bolster bank lending will be initiated in early November and is expected to continue for at least six months, as disclosed by Flaherty. The hope is that the country’s banks will not need to utilize the program. Reuters quoted Flaherty as saying, “There may be no take-up on this, and… the excellent result would be that it’s not necessary, that the banks don’t take it up.” He clarified that the program would be offered on a commercial fee basis and was unlikely to entail fiscal costs.

The Canadian Bankers Association welcomed these new measures, highlighting that Canadian banks are financially sound and well-capitalised even without federal government loan insurance. Nancy Hughes Anthony, the President and CEO of the Canadian Bankers Association, affirmed the strength of Canada’s banking institutions.

In addition to these actions, the Canadian government had recently announced a plan to purchase up to Canadian $25 billion in mortgage assets from Canadian banks to boost liquidity and stimulate lending to consumers and businesses. The government had already acquired C$5 billion in mortgages in the program’s initial phase on October 16, with a second auction of C$7 billion held more recently.

While there have been signs of improvement in global and Canadian money markets over the past two weeks, Carney cautioned against premature relaxation, stating that it was not yet time to withdraw the extraordinary liquidity injections that the central bank had initiated.

(With inputs from Reuters)

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Canada takes action to prevent recession amid global financial crisis


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