[R-G] Harper Rejects Debt Bailout, Putting Pressure on Canada Banks

[Anthony Fenton]

Harper Rejects Debt Bailout, Putting Pressure on Canada Banks
By Theophilos Argitis and David Scanlan
http://www.bloomberg.com/apps/news? 
pid=20601109&sid=a9lpYUicPdgc&refer=exclusive

Dec. 21 (Bloomberg) -- Canadian investors holding $33 billion in  
short-term debt that plunged in value will have to rely on commercial  
banks for support after Prime Minister Stephen Harper said he won't  
bail them out.

``If the government became the day-to-day underwriter of market risk  
in commercial securities markets, that's a bottomless pit,'' Harper  
said in an interview in Ottawa. A government rescue wouldn't be  
``healthy for the long-term growth of the Canadian economy.''

Harper's refusal to shore up the market for asset-backed commercial  
paper -- 30- to 90-day securities backed by car loans, credit card  
debts and mortgages -- leaves holders at the mercy of the country's  
biggest banks. Some banks have already expressed reluctance to  
provide support and are resisting pressure from the central bank.

``If the Canadian chartered banks don't go along with what they are  
apparently being promoted to do by the Bank of Canada, then what?  
Then we have a potential financial and economic problem,'' said Dale  
Orr, managing director of Canadian research in Toronto for Global  
Insight, a Lexington, Massachusetts-based economic forecasting firm.

The Canadian commercial-paper crisis comes as the nation's economy is  
weakening. Harper said he's worried that a U.S. slowdown will  
exacerbate matters, leaving little room to stimulate the economy with  
spending or tax cuts in his next annual budget proposal, due in  
February or March.

Market Freeze

Canada's market for commercial paper sold by non-bank dealers ground  
to a halt in August after Coventree Inc. and other sellers failed to  
renew maturing debt. They couldn't find enough new buyers amid  
concerns that about 9 percent of the debt is backed by U.S. subprime  
loans, which are plagued by record default rates. Foreign banks  
refused to provide backup financing, freezing the market.

``I don't think politicians, certainly not in Canada, have fully  
grasped the severity of what is going on,'' said Hans Black, chairman  
of Interinvest Consulting Corp. in Montreal, which manages about $2.8  
billion. ``We are at a very serious juncture, and there's a serious  
risk of unraveling.''

Harper, 48, said commercial-paper buyers must accept responsibility  
for their investments. Holders of the debt, which may be worth as  
little as 50 percent of face value, include Caisse de Depot et  
Placement du Quebec, Canada's biggest pension-fund manager, Barrick  
Gold Corp. and Baffinland Iron Mines Corp.

``When people undertake commercial transactions, they have to be  
prepared to assess and evaluate risks,'' Harper said on Dec. 18,  
sitting on a living room lounge chair in his residence overlooking  
the Ottawa River.

Flaherty, Dodge Helping

An investors' group led by Toronto lawyer Purdy Crawford has been  
struggling to cut a deal to swap the debt for longer- term, higher- 
interest notes to attract more buyers. The group hasn't been able to  
persuade Canada's five biggest banks to guarantee the notes to  
prevent a price plunge after they start trading. Finance Minister Jim  
Flaherty and Bank of Canada Governor David Dodge have joined the  
talks to urge the banks to support the restructuring.

``This government has been, through its agencies and arms such as the  
Bank of Canada, fully apprised of all the discussions,'' Harper said.  
``It would be very unlikely for a Conservative government to become  
the backer of commercial paper. That would run pretty strongly  
against our overall market-oriented economic policy.''

Less Fiscal Room

Harper, whose Conservative Party government may face voters in 2008,  
also said he expects a ``stand-pat fiscal policy'' next year, as the  
slumping U.S. economy further dampens Canadian exporters' main market.

``It's impossible to see how that doesn't affect this country in some  
way,'' Harper said. ``As we approach our budget, we will not be  
suddenly proclaiming oodles of fiscal room.''

That means the budget won't include ``long-term spending measures''  
or big tax cuts, he said. Delivering the capital- gains tax break he  
promised in his 2005-06 campaign also is ``unlikely'' next year,  
Harper said.

``We will be doing what households and businesses do when things are  
uncertain: We will be acting in a stable and cautious manner and we  
will be focusing on paying down the debt,'' he said.

Canada sends more than three-quarters of its exports to the U.S. The  
American housing slump, combined with a 17 percent appreciation in  
the Canadian dollar this year, has eroded U.S. demand for lumber and  
cars, two of Canada's top five exports.

Cutting Forecasts

The Finance Department cut its 2008 growth forecast to 2.4 percent  
from 2.9 percent, and the central bank cut interest rates for the  
first time in more than three years on Dec. 4.

Canada already has taken steps to protect its economy, Harper said,  
citing a C$60 billion ($60 billion), five-year tax- cut package  
enacted this month.

``We did all of our major tax initiatives early to secure domestic  
demand and create a good long-term business climate,'' Harper said.

In another matter, Harper wouldn't rule out selling all or part of  
state-owned Atomic Energy of Canada Ltd., which makes radioactive  
material for cancer screenings. A safety-related shutdown of its  
reactor from Nov. 18 until Dec. 16 caused cancer-treatment delays in  
North America.

To contact the reporters on this story: Theophilos Argitis in Ottawa  
at targitis at bloomberg.net ; David Scanlan in Toronto at  
dscanlan at bloomberg.net .