canadian policy responses to the global financial crisis and economic recession
Post on 04-Jan-2016
25 Views
Preview:
DESCRIPTION
TRANSCRIPT
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 not-so-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 fallingAnnual Debt to GDP
40
60
80
100
120
140
160
180
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
40
60
80
100
120
140
160
180
Japan Germany Italy Canada USA
%
Source: OECD
Taxes were decliningAnnual Government Tax Revenue/GDP
24
26
28
30
32
34
36
38
40
42
44
46
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
24
26
28
30
32
34
36
38
40
42
44
46
Japan Germany Italy USA Canada
%
Source: DataStream
Inflation was stable & inflation expectations were well anchored
Annual Canadian Inflation
0.5
1
1.5
2
2.5
3
3.5
4
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
0.5
1
1.5
2
2.5
3
3.5
4
Core Inflation Headline Inflation Consensus Forecast
%
Source: StatsCan,Consensus Economics
Commodity prices were rising and the loonie was strong
Annual Commodity Prices and Effective Canadian Dollar Index
40
60
80
100
120
140
160
180
200
220
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
40
60
80
100
120
140
160
180
200
220
CERI BCPI
1995=100
Source: Bank of Canada
Consumer debt levels were also rising, but not too fast
Annual Household Debt/GDP and Debt Service Ratios
6
7
8
9
10
11
12
13
14
15
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
40
60
80
100
120
140
160
Canadian HH DSR (LHS) US HH DSR (LHS)Canadian HH Debt/GDP (RHS) US HH Debt/GDP (RHS)
% %
Source: StatsCan, Federal Reserve
House prices were rising, but not bubbling
Annual House Price Indices
0
50
100
150
200
250
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
50
70
90
110
130
150
170
190
210
230
250
Ireland Spain Canada USASource: National Bank, S&P,Bank of Spain, Global Insight
2000=100
Bank leverage ratios stayed calmAnnual Leverage Ratios - Major Banks
10
15
20
25
30
35
40
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
10
15
20
25
30
35
40
Euro Area US UK CanadaSource: Bloomberg
Crisis Chronology
1. Financial Crisis began: August 2007
2. U.S. Recession began: December 2007
3. Lehman Bros Collapse: September 2008
4. Synchronized Global Recession: 2008Q4 and 2009Q1
Global banks lost moneyAnnual Bank Writedowns
0
50
100
150
200
250
300
350
400
450
Canada US UK Italy Germany Japan
0
50
100
150
200
250
300
350
400
450
2007 2008 2009Source: Bloomberg
US$ Blns
Note: 2009 Figures are YTD
Deleveraging took hold and economies contracted
Quarterly GDP Growth Rates
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
07q3 07q4 08q1 08q2 08q3 08q4 09q1
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
USA UK Euro Area Japan Canada China
% Q/Q AAR
Source: Bank of Canada, StatsCan,Bank Calculations (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*
0
50
100
150
200
250
300
350
400
Jul07 Sep07 Nov07 Jan08 Mar08 May08 Jul08 Sep08 Nov08 Jan09 Mar09
0
50
100
150
200
250
300
350
400
Canada US Europe UK* Canada: CDOR, US and UK: LIBOR, and EU: EURIBORSource: Bloomberg; last observation end of day 1 May 2009
bps
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 Actions1. 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
0
1
2
3
4
5
6
7
Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Target Rate Prime Lending Rate Core Inflation
%
Source: StatsCan, Bank of Canada
Daily Monetary Authority Policy Rates
0
1
2
3
4
5
6
2005 2006 2007 2008 2009
0
1
2
3
4
5
6
Canada USA Euro Area UK
%
Source: National Monetary Authorities
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)
Figure 1: Financing and Type of Asset Purchases
Annex on “Framework for Conducting Annex on “Framework for Conducting Monetary Policy at Low Interest Rates” Monetary Policy at Low Interest Rates”
Outlook
Quarterly Canadian GDP Growth Forecast%
Annualized Quarterly Growth %
U.S. demand composition should be more favourable to Canadian exports
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 Policy1. 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$500B; New instruments: Flexible Credit Line
• Better external and internal governance
• Address financial stability; early warning system
Extra Slides
Commodity prices were rising and the loonie was strong
Annual Energy Prices and Canadian/US Exchange Rate
0.6
0.7
0.8
0.9
1
1.1
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
40
80
120
160
200
240
280
320
360
400
440
480
520
Exchange Rate (LHS) Energy Prices (RHS)
1995=100
Source: Bank of Canada
Daily Spreads between 1-month Interbank Offered Rates and Overnight Index Swap Rates*
0
50
100
150
200
250
300
350
Jul07 Sep07 Nov07 Jan08 Mar08 May08 Jul08 Sep08 Nov08 Jan09 Mar09
0
50
100
150
200
250
300
350
Canada US Europe UK* Canada: CDOR, US and UK: LIBOR, and EU: EURIBORSource: Bloomberg; last observation end of day 1 May 2009
bps
Daily Canadian Corporate Bond Index Option-Adjusted Spreads
0
50
100
150
200
250
300
350
400
450
500
550
Jan07 Mar07 May07 Jul07 Sep07 Nov07 Jan08 Mar08 May08 Jul08 Sep08 Nov08 Jan09 Mar090
50
100
150
200
250
300
350
400
450
500
550
A BBB AASource: Merrill LynchLast observation end of day 1 May 2009
bps
Weekly Par Value Outstanding for BoC Liquidity Facilities
0
5
10
15
20
25
30
35
40
S O N D J F M A
C$ (blns)
0
5
10
15
20
25
30
35
40
Term PRA Term Loan Facility & Term PRA for Private Sector Instruments
* Outstanding values as of Thursday each week; final value is for 30 April, 2009
Source: Bank of Canada
Share of real
global GDPa
(per cent)
Projected growth (per cent)b
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. 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
Projection for Global Economic Growth
Bank of Canada Liquidity Facilities Introduced Since 2007Q4
* This facility was replaced by the Term PRA for Private Sector Instruments on 16 March, 2009** In par-value terms
Announced
Weekly Amount Offered
Peak Amount
Outstanding** Eligible Securities Approved Counterparties
Term PRA 12 Dec 07$2 to 12 billion
$37 billion
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
Term Loan Facility (TLF)
12 Nov 08 $2 billion $4.175 billionNon-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
Primary dealers and federally / provincially regulated market participants who demonstrate significant activity in private money markets
Term PRA for Private Sector Instruments
23 Feb 09Minimum $1 billion
N/ABAs, BDNs, CP, ABCP and corporate bonds
Federally / provincially regulated market participants who demonstrate significant activity in private bond and/or money markets
Canadian Fiscal Stimulus
top related