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Cablegate: Canada: Information for Summit On Financial

VZCZCXRO0160
PP RUEHGA RUEHHA RUEHMT RUEHQU RUEHVC
DE RUEHOT #1395/01 3051344
ZNR UUUUU ZZH
P 311344Z OCT 08
FM AMEMBASSY OTTAWA
TO RUEHC/SECSTATE WASHDC PRIORITY 8671
INFO RUCNCAN/ALL CANADIAN POSTS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 0165
RUEHBJ/AMEMBASSY BEIJING 2269
RUEHRL/AMEMBASSY BERLIN 1127
RUEHBR/AMEMBASSY BRASILIA 0459
RUEHBU/AMEMBASSY BUENOS AIRES 0113
RUEHBY/AMEMBASSY CANBERRA 1377
RUEHJA/AMEMBASSY JAKARTA 0244
RUEHLO/AMEMBASSY LONDON 0974
RUEHME/AMEMBASSY MEXICO 1887
RUEHMO/AMEMBASSY MOSCOW 2233
RUEHNE/AMEMBASSY NEW DELHI 0436
RUEHFR/AMEMBASSY PARIS 1037
RUEHSA/AMEMBASSY PRETORIA 0301
RUEHRH/AMEMBASSY RIYADH 0248
RUEHRO/AMEMBASSY ROME 1380
RUEHUL/AMEMBASSY SEOUL 1532
RUEHKO/AMEMBASSY TOKYO 3378
RUCNDT/USMISSION USUN NEW YORK 0493
RUEATRS/DEPT OF TREASURY WASH DC
RUEHBS/USEU BRUSSELS 0651

UNCLAS SECTION 01 OF 03 OTTAWA 001395

SENSITIVE
SIPDIS

STATE FOR EEB (DAS NELSON); EEB/OMA (SAKAUE, WHITTINGTON);
E (SMITHAM); EEB (GUEST); WHA; WHA/CAN
TREASURY FOR NEPHEW; IMB (MURDEN, MONROE, CARNES)

E.O. 12958: N/A
TAGS: CA ECON EFIN
SUBJECT: CANADA: INFORMATION FOR SUMMIT ON FINANCIAL
MARKETS AND THE WORLD ECONOMY

REF: A. STATE 114420
B. OTTAWA 1372
C. OTTAWA 1362

Sensitive but unclassified. For internal USG use only.
Please protect accordingly.

1. (sbu) Ref a requests information regarding Canada's
perspectives and concerns regarding the November 15 Summit on
Financial Markets and the World Economy -- and also regarding
the financial crisis' impact on Canada and government actions
to address the crisis. Also per ref a, Econcouns John
Carwile (tel: 613-688-5227; email: carwilejl@state.gov) is
post's primary point of contact on financial crisis/summit
matters.

2. (sbu) The following points are keyed to ref a's inquiries:

I. Key Objectives and Priorities

Canada is looking to support G-7 -- and in particular, U.S.
-- leadership in crafting an approach that uses market-based
solutions and that respects a liberalized trading system.
Canadian officials and other G8 diplomats here tell us that
Canada is still formulating its specific approach to the
Summit. Canada has said publicly and privately that the
draft Communique is very much headed in the right direction.
We understand that Canada will be looking for the following
general outcomes:

-- Canada wants to work closely with the United States and
other like-minded countries to fight off ideological attacks
against capitalism and open markets at the Summit. Canada
believes that the financial crisis arose from regulatory
failure, and not from a failure of open markets;

-- Canada believes that new regulatory structure is needed,
and that many countries will call on the United States to
increase its own financial regulation;

-- Canada is keen to have a defined, action-oriented work
plan to guide near-term work after the Summit. It is
important, Canada believes, that the all Summit participants
support the work plan; and

-- Canada supports including the G-20 at the Summit, but says
there "are a number of very angry members of the G-20 who
feel that the G-7 should have protected them from this
crisis." Canada hints that they will want to play an
intermediary role between countries calling for a
dramatically new global financial architecture and those
having qualms about giving the G-20 a bigger seat at the
table. (Comment: We suggest that such a role for Canada
might be discussed by our Sherpa/sous-sherpas with their
Canadian counterparts. End comment)

II. Key Concerns

Canada wants to ensure that G-7 stewardship remains central
to the international financial system -- and that a
considered follow-on process identifies the causes of and the
principles/actions for addressing the crisis. Canada wants
to ensure that the international financial remains
Qto ensure that the international financial remains
market-based. From Canada's domestic economic perspective,
the two most important issues are overall liquidity and

OTTAWA 00001395 002 OF 003


financial guarantees. Canadian officials are confident in
their banks' health, but are hoping to minimize the spillover
effect from the U.S. markets.

III. Impact of the Financial Market Crisis on the Financial
Sector

The World Economic Forum ranks Canadian banks as the world's
healthiest; no Canadian bank is near collapse. Canada's
regulatory oversight has strict reserve and capital
requirements -- and banks are well-capitalized. Canadian
investment banks are part of retail banking -- and brokerages
meet regulatory requirements pertaining to retail banking.
Canadian banks carry a small percentage of sub-prime
mortgages (five to six percent of the Canadian mortgage
makert is sub-prime; banks hold some 75 percent of Canadian
mortgages). Nevertheless, the Toronto stock exchange has
fallen dramatically this year. Canada has also suffered from
tightening credit flows with the large spreads between Bank
of Canada lending rates and commercial bank lending rates.
Retail banks, for example, only passed along to consumers
half of the 50 basis cut in the Bank of Canada prime rate to
consumers on October 8. (Comment: One senior private bank
official told us October 29 that the domestic banking sector
has enough liquidity, and is being hurt by lower than normal
demand for loans -- primarily from the manufacturing sector.
End comment)

IV. Actions Taken to Address the Financial Crisis

The Bank of Canada acted with the Federal Reserve, Bank of
England, European Central Bank, Sveriges Riksbank (Sweden),
and Swiss National Bank to cut their overnight target rate by
50 basis points on October 8. The Bank of Canada further
lowered its rate to 2.25 percent on October 21.
www.bank-banque-canada.ca/en/press/2008/pr08- 21.html and
www.bank-banque-canada.ca/en/fixed-dates/2008 /rate 211008.html

The Bank of Canada will provide up to C$ 20 billion in
liquidity to banks and has broadened the range of collateral
that the Bank will accept.
http://www.fin.gc.ca/news08/08-074e.html

The Bank of Canada and the Federal Reserve have a reciprocal
currency arrangement -- currency swap facility -- of US$ 30
billion (if needed) to maintain USD liquidity in the Canadian
financial institutions. To date, the Bank of Canada has not
needed to use the arrangement.
www.bank-banque-canada.ca/en/notices fmd/2008/not071008.html

Finance Canada will buy up to C$ 25 billion in insured
mortgages through the Canadian Mortgage and Housing
Corporation to provide Canadian banks with cash with an aim
to maintain the availability of longer-term credit for
consumers, homebuyers, and businesses.
http://www.fin.gc.ca/news08/08-075e.html

Finance Canada established the Canadian Lenders Assurance
QFinance Canada established the Canadian Lenders Assurance
Facility to federally insure private interbank lending -- as
long as the debt has at least a three-month term. The
Facility will expire on May 1, 2009. Participating financial
institutions will pay a base fee of 1.35 percent, plus a
surcharge ranging from 25 to 50 basis points, depending on
their credit ratings. (Canada's action parallels steps taken
by other countries to guarantee loans, and is designed to

OTTAWA 00001395 003 OF 003


keep Canadian banks competitive in the international lending
market.) http://www.fin.gc.ca/news08/08-080e.html

Canada has decided -- so far -- not to increase the C$
100,000 federal insurance on deposits in Canadian banks.

V. Current economic situation/near-term outlook.

See Ottawa 1372. The U.S. Department of Treasury also has
provided post with this information: "The Bank of Canada
"estimates growth to decelerate to 0.6 percent in 2008, and
to be 0.6 percent in 2009. Canadian credit conditions have
deteriorated significantly while equity prices have plunged
by over 25 percent. Core inflation remained within the
central bank's target range of one percent to three percent;
inflation risks are likely diminishing from a weakening
economy and declining global commodities prices. The health
of the auto sector is at the top of Canadian officials'
minds."

Visit Canada,s Economy and Environment Forum at
http://www.intelink.gov/communities/state/can ada

BREESE

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