Canada won't be spared by cash crunch

Sun Sep 28, 2008 10:31am EDT
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By John McCrank

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.   Continued...

<p>The Bay Street sign is pictured in the heart of the financial district as people walk by in Toronto, May 22, 2008. REUTERS/Mark Blinch</p>