December 12, 2007 / 1:57 PM / in 10 years

Dodge says banks must help save ABCP market-report

TORONTO (Reuters) - Bank of Canada Governor David Dodge says banks must work together to resolve one corner of the Canada’s troubled debt market, a Canadian newspaper reported on Wednesday.

In an interview with the National Post, the soon-to-retire governor said all banks will be hit if the asset-backed commercial paper market collapses, losses widen from leverage, and credit constricts and borrowing dries up.

“We have a collective interest in the whole thing not going into a shambles.”

Dodge said losses can multiply because of leverage. “Because they’re levered, the amount of global assets that would be affected if all this went down would be eight or 10 times the nominal value of the notes, so you’re starting to get into the C$200-billion, quarter-trillion-dollars’ worth.”

“So everybody, including the international banks, have a real interest in trying to somehow get this thing resolved because if these go down and a whole pile of SIVs (Structured Investment Vehicles) elsewhere go down, then you’ve got an immense number of these assets being dumped on the market at the same time.”

The specialized non-bank ABCP market stopped functioning in mid-August when investors halted purchases on concerns these investments were exposed to the U.S. subprime mortgage market.

The so-called Montreal Accord, formed by investors holding the bulk of C$35 billion ($34.5 billion) in ABCP not issued by Canada’s big six banks, is expected to this week release a plan to stop the market from collapsing in default.

Dodge said the proposed bailout would still involve losses, but they would be “cents on the dollar or nickels on the dollar and not dimes and quarters on the dollar,” and the market would heal over time.

($1=$1.01 Canadian)

Reporting by Ka Yan Ng; editing by Janet Guttsman

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