Ottawa buying up $25-billion in mortgage pools

SHAWN MCCARTHY Globe and Mail October 10, 2008 at 8:30 AM EDT OTTAWA


Ottawa is buying $25-billion in insured mortgage pools, Finance Minister Jim Flaherty announced Friday.
"This is going to make loans and mortgages more available and more affordable for ordinary Canadians and businesses," Mr. Flaherty said at a morning news conference in Ottawa.
The federal government's move is designed to backstop Canadian banks'capacity to lend money - an acknowledgment that not even the country's strong system is immune to the global financial crisis.
Mr. Flaherty is to travel to Washington to attend a meeting with the finance ministers from the Group of Seven rich industrialized countries,as they look for ways to solve the global financial crisis.
Mr. Flaherty stressed that the move is not a bailout of Canadians banks,which have been judged by the World Economic Forum to be the most sound of any G7 country.
"It is important to underline that Canada's banks and other financial institutions are sound, well capitalized and less leveraged than their international peers," he said.
Asked how many Canadian banks are at risk of failure, he said: "None."
At the end of last year, Canadians had $773-billion worth of mortgages outstanding.
Ottawa maintained that the plan will not cost taxpayers any money because the loans were already insured by Canada Mortgage and Housing Corp. The government will be earning an unspecified rate of return on the mortgages.
The move comes as Statistics Canada announced the economy created an unexpected 107,000 jobs in September - and briefly blasted the Canadian dollar up by nearly half a cent against its U.S. counterpart. The loonie quickly rejoined other major currencies in their collective plunge against the greenback.
Canadian banks have been pressuring Ottawa to move as credit markets have grown increasingly tight. The measure, originally reported by the Globe and Mail early Thursday, is intended to address the sharp rise in the cost of borrowing money.
The government move is "substantial" and should help ease liquidity pressures in Canada's money markets, said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.
While the $25-billion move does not compare with the hundreds of billions of dollars worth of measures created by U.S. decision makers,Canada's problems are not as big as the U.S. problems either, he noted.
The mortgage-swap move is "a key positive step," said economists at Bank of Nova Scotia.
They stressed that the liquidity move is not a sign of trouble in Canada's real estate markets and is meant instead to keep money flowing in short-term markets.
"The idea is to unblock credit creation channels in Canada, and help improve interbank funding pressures in Canada," the said."While Canada's banking system is well capitalized and much stronger than the banking systems in the U.S. and Europe, frozen business lending since March and recent challenges in the availability of mortgage financing in Canada required policy action.
"The Bank of Canada has also been injecting large amounts of liquidity into money markets in recent weeks, but credit flows have remained gummed up, here as elsewhere in the world. The Canadian government move is meant to supplement the central bank's moves, the Scotiabank economists said.
"This initiative by no means signals problems in Canadian mortgage quality or mortgage market fundamentals," they said. "The policy initiative is strictly designed to address liquidity and funding pressures at Canadian banks that is a by-product of an evolving global credit crisis."