Canada Joins Other Central Banks, Stocks More Dollars (Update2)

By Greg Quinn and David Scanlan

Sept. 18 (Bloomberg) -- The Bank of Canada joined the Federal Reserve and other central banks today in agreements to provide extra U.S. dollars to private lenders if needed to calm financial markets.

Canada's central bank agreed to a swap facility with the Fed, under which it could use $10 billion to inject liquidity into Canadian money markets. The Bank of Canada hasn't used any of that money yet because domestic lenders aren't having much trouble finding U.S. dollars, spokesman Jeremy Harrison said.

``This agreement provides the Bank of Canada with additional flexibility to address rapidly evolving developments in financial markets,'' the central bank said today in a statement from Ottawa. ``Canada continues to closely monitor global market developments and remains committed to providing liquidity as required to support the stability of the Canadian financial system.''

Canadian credit markets were less affected than those in the U.S. by last year's collapse of the subprime mortgage market, though concerns intensified after Lehman Brothers Holdings Inc. filed for bankruptcy. Today's swap comes as part of a Fed package that almost quadrupled the amount of dollars central banks can auction to $247 billion, in a coordinated bid to ease the worst financial-market crisis since the 1920s.

The Canadian dollar rose after today's actions and prices for exported commodities such as crude oil gained. The currency strengthened 0.2 percent to C$1.0707 per U.S. dollar at 12:15 p.m. in Toronto from C$1.0732 yesterday.

Nice `Backstop'

``This backstop is a nice thing to have,'' said Michael Gregory, senior economist at BMO Capital Markets in Toronto. Still, Gregory said his ``sense from the bank's statement'' is that Canadian policy makers don't anticipate needing to use the $10 billion.

Canada joined other central banks in December in making emergency 28-day loans to keep the financial system working, though discontinued them in July as consumer and corporate lending grew.

Today's swap agreement for U.S. dollars expires on Jan. 30. Much of the pressure to find the currency stems from time- zone differences between the U.S. and places such as Europe and Japan, which isn't a problem for Canada, Harrison said.

``Financial institutions in Canada do not appear to be experiencing difficulties in managing their U.S.-dollar liquidity needs in North America,'' Harrison said.

ECB, Bank of Japan

The Fed also today increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion ``to address the continued elevated pressures in U.S. dollar short-term funding markets.'' The Bank of England and the Swiss National Bank also participated.

``These central banks continue to work together closely and will take appropriate steps to address the ongoing pressures,'' the Bank of Canada statement said.

Along with Lehman's bankruptcy, Merrill Lynch & Co. was sold and the U.S. government bailed out insurer American International Group Inc.

The Bank of Canada on Sept. 15 bought C$2.31 billion of securities for one day, saying it was the biggest such purchase in more than eight years. The move was aimed at keeping overnight lending rates close to its target of 3 percent.

The difference in yield between Canada's three-month treasury bill and the three-month dollar London Interbank Offered Rate widened to 2.02 percentage points today, the biggest since March and double the gap on Sept. 4. The wider discrepancy signals greater perceived risk in making loans, which can slow economic growth as businesses find it harder to borrow to expand their operations.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

Last Updated: September 18, 2008 12:19 EDT