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Canada says more subprime turbulence to come

Fri Feb 8, 2008 11:28pm EST
By Louise Egan

TOKYO, Feb 9 (Reuters) - More turbulence in global financial markets is inevitable as big banks continue to write down subprime-related debt but the world's top policy makers are finally coming to terms with how to solve the problem, Canada said on Saturday.

"Certainly there is still concern with some of the U.S. financial institutions, there is no question about that," Finance Minister Jim Flaherty told Reuters in an interview prior to the G7 meeting of finance ministers and central bankers in Tokyo.

"It's clear that we're not out of the woods yet on these issues ... and not just in the United States. This is global turbulence and there's more to come. I think everyone realises that," he said.

Canada saw no need for governments to rush to tighten regulations to prevent future debacles like the one stemming from the collapse of the U.S. subprime mortgage sector, he said.

The changes should come from market players themselves, he will tell his Group of Seven colleagues in Tokyo in a Saturday meeting.

"Who is primary here in terms of reform; is it the financial institutions themselves that should be leading the reform? In our view, yes it should be," he said.

"We are more in favour of self-regulation than imposed government regulation for the simple reason that self-regulation works better."

Germany has said that if market-based efforts fail to improve disclosure in markets for highly structured debt products, then governments should be ready to step in and take the lead.

G7 policymakers are cooperating in the fiscal and monetary policy responses to the global slowdown, Flaherty said. Canada, which relies on the United States to buy three-quarters of its exports, is doing its part, he said.

A package of tax cuts introduced last October will deliver $21 billion (C$21 billion) in stimulus to the Canadian economy, or 1.4 percent of gross domestic product, he said.

And the Bank of Canada has clearly signalled more easing of interest rates, after cutting its benchmark rate by 50 basis points since December.

Canadian rates are a full percentage point higher than in the U.S. for the first time since 2004, putting upward pressure on its currency.

That is a constant concern for Flaherty, who tried to talk the currency down last November when it spiked to a modern-day high against the U.S. dollar of US$1.10 per Canadian dollar.

"I expect that the Bank of Canada will watch this carefully and I'll continue to discuss it with the governor and we'll see what action the bank ultimately chooses to take. But there are several opportunities for the bank to do that, to take action, in the next few months," Flaherty said. (US$1=$1 Canadian)

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