David Valente Real Estate, North Vancouver, West Vancouver, Downtown Vancouver

KEVIN CARMICHAEL AND BOYD ERMAN
September 24, 2008

OTTAWA and TORONTO -- The Bank of Canada joined the global effort to unclog credit markets yesterday, pledging to make $4-billion available to banks struggling to secure funding amid the worst financial crisis since the Great Depression.

It's a relatively paltry commitment compared with the tens of billions of emergency liquidity the U.S. Federal Reserve, the European Central Bank and the Bank of England have injected into markets in the past week alone.

The smaller pledge, half of which will be auctioned today, reflects the assertions by the central bank and Finance Minister Jim Flaherty that Canada is well protected from the turmoil ravaging Wall Street because the country's banks are adequately capitalized.

Still, just like a hurricane that destroys homes in Florida and floods basements in the Maritimes, Canada isn't escaping the financial storms unscathed. While still well below rates in the U.S. and Europe, the cost of credit in Canada has crept higher in the wake of the collapse of Lehman Brothers Holdings Inc. last week, forcing the central bank to resume emergency lending after ending a previous program in May.

"Canada has fared well on a relative basis, but we haven't been immune," said Mark Chandler, a fixed-income strategist at RBC Dominion Securities in Toronto. "There are some pressures in Canadian money markets."

The Bank of Canada will disperse a total of $2-billion today in the form of 84-day loans, or term purchase and resale agreements, to any of the primary dealers of government securities that choose to participate in the auction.

Next month, on Oct. 16, the central bank said it will auction $2-billion of 27-day loans, which would essentially roll over the $2-billion of 28-day term purchase and resale agreements that the Bank of Canada auctioned last week at an average yield of 3.06 per cent.

The cost of borrowing Canadian dollars was a little higher yesterday than a week ago.

One measure of the price of short-term money is the gap, or spread, between the cost of borrowing dollars on the overnight market and the cost of derivatives linked to expectations of what the benchmark interest rate will be in three months.

That spread was about 53 basis points at the time of the Bank of Canada's announcement, compared with about 50 basis points last week, according to Mr. Chandler.

The comparative spread in the U.S. was about 135 basis points. In Europe, the spread was about 80 basis points yesterday and in Britain the gap was about 127 basis points.

Bank of Canada Governor Mark Carney might also be trying to put some force behind a pledge by the Group of Seven industrial powers this week to do whatever it takes to free up credit markets.

Finance ministers and central bank heads from the G7 issued a statement yesterday after a conference call. It is unusual for the G7 to do so outside of a full-blown meeting.

After a conference call, the ministers and central bank chiefs said they "are ready to take whatever actions that may be necessary, individually and collectively, to ensure the stability of the international financial system."

The G7 includes the U.S., Japan, Germany, Britain, France, Italy and Canada. Those countries represent about two-thirds of the global economy.

"We've seen a deepening campaign around the world to break the logjam in the money markets since the Lehman bankruptcy," said Douglas Porter, assistant chief economist at BMO Nesbitt Burns in Toronto. "How quickly central banks responded last week, and now the Bank of Canada this week, suggests the central banks are ready to do what it takes for credit markets."

The Bank of Canada's decision to offer loans that won't have to be repaid until mid-October suggests banks are at least somewhat anxious that they could end up short of cash as they seek to settle their year-end accounts.

Canada's central bank has been at the ready with cash whenever lenders may need a quick infusion, which often happens around the end of the banks' fiscal quarters.

As their quarter-ends approach and banks prepare to report their financial condition to investors, they tend to hoard cash, which drives up interbank lending rates and threatens to freeze an already tight market for credit. The Bank of Canada's latest infusion will cover a period in which U.S. banks will finish their quarter on Sept. 30 and Canadian banks will have their Oct. 31 year-end, both of which could prompt credit markets to lock up.

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