Transcript Canadian Policy Responses to the Global Financial Crisis and

Canadian Policy Responses to the
Global Financial Crisis and
Economic Recession
Lawrence Schembri
International Department
May 7 2009
For presentation at the Canada Day conference, Rimini Centre for Economic Analysis, Rimini, Italy
The views expressed in this presentation reflect those of the author and not the Bank of Canada
Why is the Canadian experience
interesting & worthy of attention?
1. Canada entered the crisis in much better shape
2. Canada adopted the right policies at the right time.
3. Canada will recover faster, despite being in a notso-good neighbourhood
Bottom line:
1. Important lessons can be learned from Canada
2. The crisis will instigate useful reforms to domestic
and international policy
2007: Going into the Crisis
Government debt to GDP ratio was
falling
Annual Debt to GDP
%
180
180
160
160
140
140
120
120
100
100
80
80
60
60
40
40
1995
1996
Source: OECD
1997
1998
1999
Japan
2000
2001
Germany
2002
2003
Italy
2004
2005
Canada
2006
USA
2007
2008
2009
Taxes were declining
Annual Government Tax Revenue/GDP
46
%
46
44
44
42
42
40
40
38
38
36
36
34
34
32
32
30
30
28
28
26
26
24
24
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: DataStream
Japan
Germany
Italy
USA
Canada
Inflation was stable & inflation
expectations were well anchored
Annual Canadian Inflation
%
4
4
3.5
3.5
3
3
2.5
2.5
2
2
1.5
1.5
1
1
0.5
1995 1996 1997
Source: StatsCan,
Consensus Economics
0.5
1998
1999
2000
Core Inflation
2001
2002
2003
Headline Inflation
2004
2005
2006
2007
Consensus Forecast
2008
Commodity prices were rising and
the loonie was strong
Annual Commodity Prices and Effective Canadian Dollar Index
1995=100
220
220
200
200
180
180
160
160
140
140
120
120
100
100
80
80
60
60
40
40
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Bank of Canada
CERI
BCPI
Consumer debt levels were also
rising, but not too fast
Annual Household Debt/GDP and Debt Service Ratios
%
160
%
15
14
140
13
12
120
11
100
10
9
80
8
60
7
6
1995 1996 1997
Source: StatsCan,
Federal Reserve
40
1998 1999 2000 2001 2002
Canadian HH DSR (LHS)
Canadian HH Debt/GDP (RHS)
2003 2004 2005 2006 2007
US HH DSR (LHS)
US HH Debt/GDP (RHS)
2008
House prices were rising, but not
bubbling
Annual House Price Indices
2000=100
250
250
230
200
210
190
150
170
150
100
130
110
50
90
70
0
1995 1996 1997 1998
Source: National Bank, S&P,
Bank of Spain, Global Insight
50
1999 2000
Ireland
2001 2002
Spain
2003
Canada
2004 2005
USA
2006 2007
2008
Bank leverage ratios stayed calm
Annual Leverage Ratios - Major Banks
40
40
35
35
30
30
25
25
20
20
15
15
10
10
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg
Euro Area
US
UK
Canada
Crisis Chronology
1.
2.
3.
4.
Financial Crisis began: August 2007
U.S. Recession began: December 2007
Lehman Bros Collapse: September 2008
Synchronized Global Recession: 2008Q4
and 2009Q1
Global banks lost money
Annual Bank Writedowns
US$ Blns
450
450
400
400
350
350
300
300
250
250
200
200
150
150
100
100
50
50
0
0
Canada
Source: Bloomberg
US
UK
2007
Italy
2008
2009
Germany
Japan
Note: 2009 Figures are YTD
Deleveraging took hold and
economies contracted
Quarterly GDP Growth Rates
% Q/Q AAR
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
-6
-8
-8
-10
-10
-12
-12
-14
-14
07q3
07q4
08q1
Source: Bank of Canada, StatsCan,
Bank Calculations (China)
USA
UK
08q2
Euro Area
08q3
Japan
08q4
Canada
09q1
China
Canadian Policy Responses
• Financial Sector
• Fiscal Policy
• Monetary Policy
Financial Sector Policy
1. Liquidity provision (Bank of Canada)
2. Bank liability guarantees (Government of
Canada) – “Lenders Assurance Facility”
3. Support for credit markets (Government
of Canada)
4. NOT NEEDED - Removal of toxic assets
/ bank capital injections
Liquidity Facilities
•
The Bank of Canada has introduced several
new facilities to provide liquidity to capital
market participants:
1. Swaps of high quality, but less liquid assets for
short-term government bonds
2. Collateralised loans
• Key innovations: Wider sets of participants and
acceptable collateral
Credit Market Support
1. CDN $125B Insured Mortgage Purchase
Program
2. Additional CDN $13B for Export Development
Canada, Business Development Bank of
Canada, and several other Crown corporations
to facilitate trade and business credit
3. CDN $12B Canadian Secured Credit Facility, to
support vehicle leasing through purchases of
Asset Backed Securities
Daily Spreads between 3-month Interbank Offered Rates and
Overnight Index Swap Rates*
bps
400
400
350
350
300
300
250
250
200
200
150
150
100
100
50
50
0
Jul07
0
Sep07 Nov07 Jan08 Mar08 May08
* Canada: CDOR, US and UK: LIBOR, and EU: EURIBOR
Source: Bloomberg; last observation end of day 1 May 2009
Jul08
Canada
Sep08 Nov08 Jan09 Mar09
US
Europe
UK
Canadian Fiscal Stimulus
1. Approximately CDN $40B or 2.5% of GDP
2. 60% will be infrastructure spending
3. 55% will be spend in 2009 and 2010
4. CDN $8.0B in permanent personal and
corporate tax cuts
5. Leverage infrastructure/community spending
with the provinces to reach CDN $50B
Monetary Policy Actions
1. Aggressive interest rate cuts: 425 basis
points in 16 months to a target overnight rate
of 0.25%
2. Unconventional policy measures
•
•
•
Conditional statement: hold rates at this level
until 2010Q2 conditional on inflation outlook
Term Purchase and Resale Agreements (6-12
months in duration)
Framework for credit and quantitative easing
Monthly Canadian Policy Rates and Inflation
%
5
7
4.5
6
4
5
3.5
3
4
2.5
3
2
1.5
2
1
1
0.5
0
Jan 04
0
Jul 04
Jan 05
Jul 05 Jan 06
Target Rate
Source: StatsCan, Bank of Canada
Jul 06 Jan 07 Jul 07 Jan 08 Jul 08
Prime Lending Rate
Core Inflation
Jan 09
Daily Monetary Authority Policy Rates
6
%
6
5
5
4
4
3
3
2
2
1
1
0
2005
2006
Source:
National Monetary Authorities
0
2007
Canada
USA
2008
Euro Area
UK
2009
Aside: Credit and Quantitative Easing
• Quantitative easing -- outright purchase of
government or private sector assets with central
bank reserves
• Credit easing -- outright purchase of private sector
assets with the sale of other central bank assets
(sterilized purchases) or in conjunction with
quantitative easing and the creation of central
bank reserves (unsterilized purchases)
Annex on “Framework for Conducting
Monetary Policy at Low Interest Rates”
Figure 1: Financing and Type of Asset Purchases
Outlook
Quarterly Canadian GDP Growth Forecast
%
U.S. demand composition should be more
favourable to Canadian exports
Annualized Quarterly Growth
%
Projection for Total CPI Inflation
Lessons for Domestic Policy
•
Macroprudential oversight of financial system
•
Mitigate procyclicality in banking regulation
•
National securities regulator
•
Monetary policy at low interest rates
•
Monetary policy should not ignore financial
stability concerns
Lessons for International Policy
1. Financial Stability Board - Bigger and Tougher
•
Common standards/rules for financial sector
•
College of supervisors of global financial
institutions (peer review process)
•
Crisis resolution procedures for ``too big to fail``
2. IMF – More resources and More Candid
•
+ US$500B; New instruments: Flexible Credit Line
•
Better external and internal governance
•
Address financial stability; early warning system
Extra Slides
Commodity prices were rising and
the loonie was strong
Annual Energy Prices and Canadian/US Exchange Rate
1995=100
1.1
520
480
440
1
400
360
0.9
320
280
240
0.8
200
160
0.7
120
80
0.6
40
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Bank of Canada
Exchange Rate (LHS)
Energy Prices (RHS)
Daily Spreads between 1-month Interbank Offered Rates and
Overnight Index Swap Rates*
350
bps
350
300
300
250
250
200
200
150
150
100
100
50
50
0
Jul07
0
Sep07 Nov07 Jan08 Mar08 May08
* Canada: CDOR, US and UK: LIBOR, and EU: EURIBOR
Source: Bloomberg; last observation end of day 1 May 2009
Jul08
Canada
Sep08 Nov08 Jan09 Mar09
US
Europe
UK
Daily Canadian Corporate Bond Index Option-Adjusted
Spreads
550
bps
550
500
500
450
450
400
400
350
350
300
300
250
250
200
200
150
150
100
100
50
50
0
0
Jan07 Mar07 May07 Jul07 Sep07 Nov07 Jan08 Mar08 May08 Jul08 Sep08 Nov08 Jan09 Mar09
Source: Merrill Lynch
A
BBB
AA
Last observation end of day 1 May 2009
Weekly Par Value Outstanding for BoC Liquidity Facilities
C$ (blns)
40
40
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
S
O
N
D
J
F
M
A
* Outstanding values as of Thursday each week; final value is for 30 April, 2009
Source: Bank of Canada
Term PRA
Term Loan Facility & Term PRA for Private Sector Instruments
Projection for Global Economic Growth
Share of real
global GDPa
(per cent)
2008
2009
2010
2011
United States
22
1.1 (1.2)
-2.4 (-1.7)
1.2 (2.6)
2.9
European Union
20
0.7 (0.9)
-3.6 (-1.0)
-0.2 (2.1)
1.8
Japan
7
-0.7 (0)
-6.2 (-1.7)
0.1 (2.0)
2.5
China and Asian NIEsc
14
7.1 (7.5)
3.5 (5.6)
6.0 (6.9)
7.3
Others
37
4.9 (5.0)
1.0 (2.7)
3.0 (4.3)
4.0
World
100
3.2 (3.4)
-0.8 (1.1)
2.2 (3.7)
3.7
a.
Projected growth (per cent)b
GDP shares are based on IMF estimates of the purchasing-power-parity (PPP) valuation of country GDPs for 2006.
Source: IMF, WEO Update, October 2008.
b.
Numbers in parentheses are projections from the January 2009 Monetary Policy Report Update.
c.
NIEs are newly industrialized economies. These include Hong Kong (Special Administrative Region), South Korea,
Taiwan (Province of China), and Singapore.
Source: Bank of Canada
Bank of Canada Liquidity Facilities Introduced Since 2007Q4
Weekly
Peak
Amount
Amount
Announced Offered Outstanding**
Term PRA
12 Dec 07
$2 to 12
billion
$37 billion
Term Loan
Facility (TLF)
12 Nov 08
$2 billion
$4.175 billion
Eligible Securities
Approved Counterparties
SLF eligible: GOC
securities, NHA-MBS,
CMBs, other government
guaranteed securities,
provincial bonds, BAs,
CP, ABCP, BDNs,
corporate bonds, UST
Primary dealers and direct participants
in the Large Value Transfer System
Non-mortgage loan
portfolios
Direct participants in the Large Value
Transfer System
Term PRA for
Private Sector
Money Market*
14 Oct 08
$1 billion
$25 million
BAs, BDNs, CP, ABCP
Term PRA for
Private Sector
Instruments
23 Feb 09
Minimum
$1 billion
N/A
BAs, BDNs, CP, ABCP
and corporate bonds
* This facility was replaced by the Term PRA for Private Sector Instruments on 16 March, 2009
** In par-value terms
Primary dealers and federally /
provincially regulated market
participants who demonstrate significant
activity in private money markets
Federally / provincially regulated market
participants who demonstrate significant
activity in private bond and/or money
markets
Canadian Fiscal Stimulus