Wednesday, November 30, 2011

Canada joins move to fight global financial meltdown

Synergy Debt Group -- from  thestar.com

Canada joins move to fight global financial meltdown

Les Whittington
Ottawa Bureau

OTTAWA—Bank of Canada Governor Mark Carney joined with his central bank colleagues around the world in a coordinated move designed to keep the European debt crisis from prompting a global financial meltdown.

In an effort to prevent a freeze-up in commercial bank credit of the kind that plunged the world into recession in 2008, the central banks said they will make it cheaper starting next Monday for financial institutions to obtain U.S. dollars outside of the United States.
The Bank of Canada said the coordinated strategy was intended to ensure that commercial banks could continue to provide the business and consumer loans needed to keep the global economy from heading into a tailspin.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” Carney’s office said in a statement.

Besides the Bank of Canada, the surprise move involved the Bank of England, the Bank of Japan, the European Central Bank, the U.S. Federal Reserve and the Swiss National Bank.
Stock markets reacted positively in Toronto and New York and the Canadian dollar surged more than a full U.S. cent. The loonie jumped 1.06 cents to 98.12 cents (U.S.) early Wednesday.
The central banks were responding to rising fears that the European debt crisis could soon veer out of control, leading to loan defaults by debt-burdened countries on the continent and setting off a financial crunch that could spread to other countries and spark a repeat of the 2008-09 global recession.

Fears of more financial turmoil in Europe have already left some European commercial banks dependent on central bank loans to fund their daily operations. Other banks are wary of lending to them for fear of not getting paid back.

Analysts said it was encouraging that the central bankers were stepping in to offer assurances about liquidity.

“It feeds into the idea that policymakers are at least beginning to address the problem,” said Mark Cliffe, chief economist with ING Group.

“With the dire scenarios doing the rounds the last few days, it’s all the more important they step in with aggressive measures to support the banking system and show they’re beginning to confront the financing problems of the sovereigns as well.”

On Wednesday, traders also took in data showing that real gross domestic product in Canada grew at a better-than-expected annualized rate of 3.5 per cent in the third quarter after a second-quarter drop of 0.5. Economists had expected a reading of 3 per cent.
The energy sector led the way and notable increases also occurred in manufacturing, construction, wholesale trade and the transportation and warehousing sector.

Commodity prices ran up smartly in the wake of the central bank announcement with the January crude contract on the New York Mercantile Exchange up $1.73 to U.S.$101.52 a barrel.
Metal prices also advanced sharply with the March copper contract ahead 12 cents to U.S. $3.51 a pound while the February gold contract was ahead $26.70 to U.S. $1,745.60 an ounce.
The reassurance from major central banks further enhanced positive sentiment arising from moves by China to ease lending and encourage growth.

China’s central bank announced that the amount of money China’s commercial lenders must hold in reserve will be cut by 0.5 per cent of their deposits, effective Dec. 5. It was the first easing of monetary policy in three years.

Lending has been tightened as Beijing dealt with unacceptably high levels for inflation, especially for food.

But analysts have expected China to loosen lending controls after inflation eased to 5.5 per cent in October from a three-year high and a surge in housing prices levelled off.
China has been a rare bright spot for the global economy since the financial crisis of 2008.

With files from Canadian Press and Reuters

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