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.