BANK OF CANADA GOVERNOR ON G20 SUMMIT AND

C O N F I D E N T I A L OTTAWA 001510 SIPDIS TREASURY FOR NEPHEW STATE FOR E (SMITHAM),EB (GUEST),WHA/CAN, EBB/TPP/MTAA PASS TO USTR FOR CARA MORROW E.O. 12958: DECL: 12/01/2018 TAGS: ECON EFIN CA ETRD PREL SUBJECT: BANK OF CANADA GOVERNOR ON G20 SUMMIT AND INTERNATIONAL FINANCIAL CRISIS REF: A. OTTAWA 1497 ¶B. STATE 125609 ¶C. OTTAWA 1502 Classified By: DCM Terry Breese, Reason 1.5 (B, D) ¶1. (c) Summary: Bank of Canada Governor Mark Carney and Deputy Governor John Murray told DCM and EMIN in a November 28 meeting that Bank officials were pleased with the G-20 Summit statement of principles. Carney stated that the Summit had acknowledged the global financial system's failures, and that President Bush handled the meeting well with a sensible agenda and by setting tight deadlines. On the Canadian front, Carney expressed guarded confidence about Canada's financial and housing markets, even as he recognized the overwhelming effect of Canada's close links to the U.S. economy. End Summary ¶2. (c) Governor Mark Carney and Deputy Governor Murray told DCM and EMIN in a November 28 meeting that Bank officials were pleased with the G-20 Summit statement of principles, especially in light of French President Sarkozy's and British Prime Minister Brown's public comments before the November 14-15 meeting. Carney stated that the Summit had acknowledged the global financial system's failures, and that President Bush handled the meeting well with a sensible agenda and by setting tight deadlines for follow-up action. Carney said the Summit also found the right balance by not redrawing the Bretton Woods institutions or creating new international superstructures. Still, Carney said, he would have liked more attention paid to immediate government actions and he wished the meeting had had more real impact on financial markets. (By contrast, Carney said, the November 8 Finance Ministerial in Brazil had been a "typical G-20 disappointment," with "posturing and adolescent requests" from the major emerging economies.) ¶3. (c) Carney underlined the need for stimulus actions around the world. He said central banks had been shoring up their financial systems, but some countries probably needed to be more aggressive. On the fiscal side, Carney said Canada first proposed the idea that countries spend an average of 2.5 percent of GDP on stimulus packages (the IMF later reduced the recommendation to two percent, Carney noted). He said each country could adjust its stimulus actions depending on circumstances. In Canada, for example, monetary policy is "still working" and the Canadian government may look to the Bank for more stimulus before taking additional fiscal actions (ref c). ¶4. (c) Carney stated that while he was pessimistic in the near term regarding the United States and Canada on the economic front, he believed that the right structural steps were being taken. Carney praised USG actions addressing our problems, and expressed "tremendous faith in the recovery powers" of the U.S. financial system. Unlike other Qpowers" of the U.S. financial system. Unlike other countries, he said, the United States would have a relatively short -- though painful -- recovery period because it would write off assets, recapitalize, and allow companies to go out of business. Carney added that the Bush Administration had excellent people in place who continued to make important decisions. Carney also stated that President-Elect Obama was putting together a formidable economic team and that he (Carney) had "tremendous respect" for Treasury Secretary nominee, Tim Geithner. ¶5. (c) Carney commented that the biggest issue in the U.S. financial crisis may be the need to separate out "bad assets" at financial institutions. In a perfect world, he said, the TARP would both recapitalize financial institutions and deal directly with bad assets, many of which are simply "terrible" and highly leveraged. Carney said the example of creating a "bad bank" at Citicorp was exactly the right idea. ¶6. (c) Looking ahead, Carney expressed concern that progress toward resolving the global financial crisis could be undermined by two broad trends: (1) a retreat from trade openness, and (2) countries imposing capital controls. He applauded USG actions to rally support against recent trade protectionist measures (refs a, b) in Indonesia, Brazil, Argentina, and elsewhere. Carney also stated that large amounts of capital have been invested in Asian and Latin American countries that these countries may look to keep that capital at home, undermining progress made on the free flow of capital over the last two decades. ¶7. (c) On the domestic economy, Carney indicated that Canada was in relatively good shape with domestic consumption growing (albeit at lower rates) and solid household credit demand (credit card, auto financing, mortgages). He commented that a few housing markets were "softening" (e.g., Vancouver, Calgary),but that housing was only a 0.6 percent drag on the economy. Carney stated that Canada's mortgage market was strong due to strong federal regulation and the fact that most mortgages were fixed rate and were underpinned by significant down payments or mortgage insurance from a government-sponsored agency. Carney also noted that Canada had never seen a refinancing boom because the cost of refinancing in Canada is high compared to in the United States. Visit Canada,s Economy and Environment Forum at http://www.intelink.gov/communities/state/can ada WILKINS