Canada bolsters banks, teeters on recession's edge

Thu Oct 23, 2008 6:21pm EDT
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By Louise Egan

OTTAWA (Reuters) - Canada reinforced its banking sector with loan guarantees on Thursday in a bid to mute the impact of a global financial crisis that is forecast to push the country to the edge of recession.

The move mirrors multibillion-dollar programs in the United States and Europe to restore lending confidence after a series of bank failures -- many stemming from soured investments in bad U.S. mortgages.

"The government of Canada is acting today to ensure that financial institutions in this country are not put at a competitive disadvantage when raising funds in wholesale markets to lend to consumers and businesses," Finance Minister Jim Flaherty told reporters.

The global economic turmoil, which has slammed world markets and dragged consumer confidence to its lowest levels in decades, is expected to push Canada's economy to the brink of recession, the Bank of Canada said Thursday.

In its quarterly report, the central bank projected the economy would shrink 0.4 percent in the fourth quarter of this year and would record zero growth in the first quarter of 2009. The technical definition of a recession is two consecutive quarters of economic contraction.

Bank of Canada Governor Mark Carney said he would not describe the economic outlook as recessionary, just sluggish, and Flaherty said he thought a recession could be avoided.

A steep weakening of the Canadian dollar could offset sliding commodities markets by helping manufacturers.

In addition, a cumulative reduction in the bank's key interest rate of 225 basis points since last December, should start to stimulate the economy in coming months, Carney said. And Canada entered the crisis better off than other developed economies in terms of its housing and banking sectors, he said.   Continued...

<p>Canadian currency in the form of twenty dollar bills are displayed in this posed photograph in Toronto, October 22, 2008.REUTERS/Mark Blinch</p>