TORONTO (Reuters) - The global liquidity crisis could sap Canadian debt and equity markets for years to come even though domestic lenders have little exposure to the bad loans gumming up Wall Street.
Banks around the world have been loath to lend to one another with liquidity drying up in the wake of the financial crisis. Many financial institutions bought into the complex U.S. mortgage-based securities packages at the heart of the meltdown, and nobody knows their value now that the U.S. housing sector has tanked.
The liquidity crunch intensified on Friday, after Washington Mutual, the largest U.S. savings and loan, was taken over by authorities and its deposits auctioned off.
"We are going to have tight monetary conditions over the next couple of years," said Gavin Graham, director of investments at BMO Asset Management.
"Banks and financial institutions are the ultimate lenders of umbrellas when it's sunny ... (and they) demand them back when it's raining."
WaMu has joined a growing list of U.S. failures and takeovers, and the bank's demise -- along with worries about the unprecedented $700 billion bailout plan for the U.S. financial sector -- sent equities tumbling.
The Toronto Stock Exchange fell 420.51 points, or 3.35 percent, to 12,126.00 on Friday and was down 6.1 percent on the week.
Bank of Canada Governor Mark Carney said on Thursday that the credit crunch could intensify the current global economic slowdown and would have an impact on the cost of capital in Canada, despite the relative strength of domestic financial institutions.
Indeed, almost a third of Canadian corporate funding comes from the United States, so conditions there have a direct impact here.
"Take something like a Bell Canada, which is getting funding from a number of sources... You've got some Canadian, some U.S., and depending on the stability of whoever the lender is, you may or may not get everything you need and you might have to go and replace that sort of funding," said Adrian Mastracci, portfolio manager and president at KCM Wealth Management Inc in Vancouver.
Mastracci says firms that need bridge financing or want to float a bond to raise capital could have trouble in the current environment. Even if they can borrow, it may cost more.
"Or sometimes even trying to float an (initial public offering), because if you don't have all the funding in place, you may have difficulty trying to get people to buy in. So that can affect both the equity and the debt markets for these businesses in Canada."
While Canadian banks have seen their lending costs go up, they are still well capitalized, positioning them to take advantage of the market weakness.
"They are going to be the ones buying cheap assets from distressed sellers," said BMO's Graham.
"There will be lots of M&A done by sort of boutique investment banks whose sole job is doing M&A, rather than big investment banks who are going to do the deal and provide you with the financing and sell the bits and that sort of thing -- that model is gone."
Graham added that companies with strong balance sheets will do well, and pointed to the takeover activity surrounding Toronto-based Teranet Income Fund as an example.
Teranet's electronic land-registry business is coveted for its steady cash flow, and big pension funds, flush with cash, have expressed interest. There is one offer of C$1.7 billion ($1.64 billion), plus debt, already on the table and other potential bidders are in the wings.
Graham says the rules of the game have changed. Even if the U.S. bailout package races through Congress, staving off outright disaster, conditions won't return to normal any time soon.
"Undoubtedly, there are going to be tighter monetary conditions. What this stops is the whole thing spiraling into an out of control pandemic like the 1930s."
Reporting by John McCrank; editing by Rob Wilson