11-010-XIB
Canadian Economic Observer
November 2008

Canada

BC announced several initiatives including a 5% cut in income tax retroactive to January 1, 2008, accelerating a tax cut for small business with the rate reduced to 2.5% from 3.5%, and unlimited deposit insurance for credit union customers.

Saskatchewan unveiled several tax changes, including a $4000 increase in both the basis personal and spousal exemption, a $2000 increase in the child tax credit, and a revamping of its low income tax credit system. The government also committed to a 50% increase in infrastructure funding in the 2009-2010 budget.

Canada’s Accounting Standards Board changed the “mark to market” accounting rules for banks to allow them to move troubled assets from their trading books, where they must be priced at current market values, to their banking books, where they can be held until their value returns.

Suncor Energy cut its expected spending in 2009 by one-third due to uncertainty over oil prices and credit availability, and will delay its Voyageur upgrader by one year. BA Energy, Nexen/OPTI Canada, Value Creation and PetroCanada also announced delays in upgrader projects. Royal Dutch Shell postponed a 100,000 barrel a day expansion at its Athabasca oil sands mine. Nexen’s Buzzard oil field in the North Sea reached full production and its $6.6 billion Long Lake oil sands project officially opened.

FNX Mining suspended commercial production at its Levack nickel mine near Sudbury, as did First Nickel, due to low prices and high operating costs, while North American Palladium limited its Lac des Iles mine to care and maintenance.

Chrysler announced it will eliminate 5,000 salaried positions in North American (25% of its salaried workforce) through buyouts and layoffs if necessary. GM announced it will eliminate some salaried jobs and scale back benefits for salaried employees. Both GM and Chrysler cut output in the fourth quarter and Hyundai and Ford announced temporary stoppages at two US plants. Daimler AG will permanently close its Sterling Truck operation in St. Thomas next month.

World

The global financial crisis intensified into October. On October 3, the US passed the Emergency Economic Stabilization Act of 2008, providing $700 billion to buy illiquid mortgage-backed securities, an expansion of bank deposit guarantees to $250,000 and $100 billion in tax breaks for businesses and alternative energy. Wachovia was acquired by Wells Fargo. In Britain, the Financial Services Authority raised its guarantee on bank deposits from 35,000 pounds to 50,000 pounds. The government of the Netherlands took over the Dutch operations of Fortis, replacing earlier bailout plans.

By October 6, the government of Iceland seized control of domestic banks and trading was temporarily suspended for all financial instruments. The French bank, Paribas, assumed control of the remaining assets of Fortis following Dutch nationalization of the operations of the bank. Denmark, Austria, and Germany joined Ireland and Greece in guaranteeing bank deposits.

On October 7, the Federal Reserve announced the formation of a Commercial Paper Funding Facility (CPFF) to be a funding backstop to facilitate the issuance of term commercial paper by eligible issuers. Taiwan doubled its deposit guarantees to $92,000 (US) and the EU to 50,000 euros, while the Netherlands, Spain, Belgium and Greece raised theirs to 100,000 euros. On October 8, Britain announced it would make 25 billion pounds in capital available to its main banks and an additional 25 billion pounds available to other financial institutions, including British subsidiaries of foreign banks. The EU, Britain, US, Canada, Sweden and Switzerland simultaneously cut interest rates by 50 basis points. This was followed by rate cuts in Australia, Bahrain, China, Hong Kong, India, Israel, Kuwait, South Korea, and Taiwan. The Federal Reserve loaned AIG a further $37.8 billion. Iceland abandoned attempts to peg its currency to the euro and by October 9, suspended all trade in the currency.

On October 10, stock markets dived across Europe, Asia and North America. The bonds of the bankrupt Lehman Brothers were auctioned and sold for 8 cents on the dollar. Canada announced it would inject $25 billion of additional liquidity through the purchase of insured mortgage pools. The Russian parliament authorized lending of $36 billion gained from global oil sales to shore up Rosselkhozbank. On October 11, the US government announced a change in emphasis in its rescue efforts from buying illiquid assets to recapitalizing banks in exchange for preferred equity.

On October 12, European countries announced plans to guarantee bank deposits for five years, and recapitalization plans for banks in Britain, Italy, France, Germany, Spain, Austria and the Netherlands totalling 1 trillion euro. Australia and New Zealand also announced bank guarantee plans. On October 13, the UK government injected 37 billion pounds into the nation’s three largest banks, ending up with a majority share in the Royal Bank of Scotland and 40% shares in Lloyds and HBOS. The European Central Bank attempted to revive credit markets by weekly injections of unlimited euro funds at an interest rate of 3.75%.

On October 14, the US announced a plan to take an equity interest in preferred stock of $250 billion in US banks, with $25 billion going to each of the four largest banks. The plan guarantees all senior debt by banks over the next three years and provides unlimited FDIC insurance to all non-interest bearing accounts which are primarily used by businesses. Japan announced the lifting of restrictions on companies buying back their shares, increased disclosure on short-selling and the temporary suspension of the sale of government-owned stocks. Australia unveiled a $10.4 billion economic stimulus plan designed to help pensioners, low and middle-income families and first time home buyers. The Iceland stock exchange began trading after a three-day shutdown, not including its three newly-nationalized banks.

On October 16, a rescue plan was announced for Swiss banks UBS and Credit Suisse, involving Swiss government funds, private investors and the sovereign wealth fund of Qatar.

On October 19, the government of the Netherlands injected ING with 10 billion euro. On October 20, Belgium rescued insurance company Ethias with a 1.5 billion capital injection. BeyernLB applied for funds from Germany’s rescue program. Sweden announced the creation of a 1.5 trillion kronor fund to support inter-bank lending and a 15 billion kronor capital injection plan. France announced a 10.5 billion euro rescue plan for six of its largest banks, including Crédit Agricole, BNP and Société Générale.

On October 20, Pakistan joined Iceland, Hungary, Serbia and Ukraine in requesting aid from the IMF to cope with severe balance of payments difficulties. These countries, along with, Russia, Turkey, South Africa, Argentina, Estonia, Latvia, Lithuania, Romania and Bulgaria were affected by the inability to borrow money. Hungary and Ukraine made temporary arrangements with the IMF for emergency aid packages, joining Iceland, Belarus and Pakistan. Iceland hiked interest rates from 12% to 18% as part of its $2 billion bailout from the IMF.

On October 21, the Bank of England allocated $26 billion in an auction of unlimited one-month funds and the Saudi central back injected $3 billion into its banking system, the first time in a decade. The Bank of Canada cut its overnight rate a quarter point to 2.25%. On October 22, the Federal Reserve unveiled its fourth program to help the money market industry, saying it could lend up to $540 billion to be used to buy certificates of deposit and commercial paper. In a second round of recapitalization, the US Treasury funded 16 banks with $33 billion.

On October 29, the US Federal Reserve cut it federal funds rate by half a percentage point to 1% and offered $30 billion to Brazil, Mexico, South Korea and Singapore via four new currency swap lines. Japan announced a $51 billion package of spending measures to support its economy and Germany unveiled a $32 billion package to boost business. The IMF approved an emergency short-term liquidity facility for emerging market economies. China cut its one-year lending rate to 6.66% from 6.93%, the third drop in six weeks. On October 31, Japan cut interest rates for the first time in seven years, lowering its overnight call rate to 0.30% from 0.50%.