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The U.S.-dollar bond issue would provide funds to augment the country's foreign exchange reserves and meet requirements to support lending by the International Monetary Fund, the Department of Finance said Friday. A department spokesman said the bond offering could be as large as US$3-billion. There are no details about timing, other than it could be done "shortly."

Earlier this year, at the Group of 20 summit in London, Canada agreed to provide the IMF with US$10-billion so the global institution can provide funds to countries that need help with their balance of payments during the economic crisis. Plus, in June, Canada agreed to contribute US$200-million to a World Bank program aimed at enhancing global trade financing.

Canada has foreign currency reserves of US$45-billion, as of earlier this month.

Analysts say the move is likely to have no impact on the movement on the Canadian dollar, which was trading in the US92¢ range Friday. Nor should it be interpreted as a move by Canadian policy makers to pull down the currency.

"The announcement does not signal a move toward Canadian dollar intervention," said Derek Holt, vice-president of economics at Scotia Capital, in a note to clients.

If anything, analysts say, the move would be positive for the loonie should the U.S. dollars raised be converted back into Canadian dollars -- something analysts don't expect to happen given the concern raised by Bank of Canada officials and Jim Flaherty, Minister of Finance, about the Canadian currency's strength.

In a speech this week, Bank of Canada deputy governor Timothy Lane said the Canadian dollar represented an "important" risk to the country's economic outlook and raised the spectre of deploying so-called quantitative easing -- by which the central bank floods financial markets with cash through the acquisition of securities -- in an effort to minimize that risk.

Eric Lascelles, chief economist and rates strategist at TD Securities, said it seems "reasonably clear" the money to be raised will not go toward funding government operations, which have increased substantially due to a two-year, $46-billion stimulus plan that will result in a $50-billion deficit this fiscal year.

In fact, Mr. Lascelles said the government's existing debt-management strategy -- to raise $101-billion in Canadian-dollar bonds in capital markets this fiscal year -- appears "more than ample" to handle the deficit spending.

"Frankly, my sense is that the schedule for bond issuance be in excess of the ultimate needs," he added, noting there is now little take-up among chartered banks of the government's $125-billion buyback of insured mortgages -- an initiative meant to ensure ample liquidity during the financial downturn.

"This really is a side note that addresses some U.S. [dollar] obligations that have come up in sporadic cases."

In recent years, the country has acquired funds for its foreign-exchange reserves through cross-currency swaps. The reserves provide foreign currency liquidity and support the Canadian dollar in foreign exchange markets.

The bond issue, Finance said, "will prudently diversify the government's sources of foreign currency financing."

Mr. Lascelles added the amount of outstanding foreign-denominated Canadian bonds has dropped sharply in the past year, from $8-billion to $200-million.

Financial Post

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