Lots of news today for the Canadian economy…
“September employment soars unexpectedly“. The headline is that we added 107,000 new jobs which is 10 times what was expected. The part I think is kinda shocking: only 10,000 were full-time jobs. The rest are part-time.
“Ottawa buying $25 billion in mortgage pools“. I’m somewhat confused why this was their move to add liquidity. Why not guarantee 100% of retail deposits like Ireland just did? That’s also big news as basically every other EU nation will have to do the same.
“Loonie continues its decline“. It’s at $1.17 on the greenback. This is the best news I’ve heard in weeks.
Ireland’s guarantee is a move to prevent a run on the banks and thus ensure liquidity.
The Canadian situation is a little different. The system is quite strong, however, the current environment has our banks in a rut - the market for CDO/CMO asset class is frozen in the US and Europe. The concern right now for those managing the Canadian economy (BOC and Fed Gov) is that the banks will restrict their lending to customers because their balance sheets are tightening due to the fact they run the risk of not meeting their capital ratios that measure liquidity
This specific tranche of mtgs being sold are considered low risk investments because the approval process associated with CMHC insured mtgs is fairly stringent. The BOC should walk away with a nice profit of 1-2% (given the spread between Canadian treasuries and mtg rates)
Now by selling the BOC $25MMM in mtg pools, the banks would free up about $25MMM in room to lend (1:1 ratio).
This differs from the European (and now American) re-capitalization where a $25MMM equity investment is the equivalent of $250MMM (assuming a 10x multiplier) in new credit available in the marketplace.
Hope this clarifies.