Canada bolsters its banks, sees recession near

TORONTO - Canada's government said Thursday it will guarantee loans between banks, and its central bank said the country — the United States' largest trading partner — is on the brink of recession.

Finance Minister Jim Flaherty said the government will temporarily backstop interbank borrowing because it doesn't want to leave Canada's private banks at a competitive disadvantage against those in other countries that have already received government guarantees.

"There is this concern that our institutions could be disadvantaged competitively," Flaherty said.

Flaherty announced two weeks ago that the government would buy $25 billion Canadian ($20 billion) worth of mortgages from the banks to help free up money for loans.

He said Canada's banks are sound, well capitalized and less leveraged than their international peers but that the government must proactive.

Canada's private banks initially declined to pass on to consumers the full half percentage-point cut in interest rates announced by central banks around the world on Oct. 8 — a move that affected Canadians' ability to get or afford loans for mortgages and businesses.

But most of the banks cut the interest rates by a full half point after the Canadian government announced the $25 billion Canadian ($20 billion) bailout.

Canada's central bank cut interest rates by a quarter-point on Tuesday, following the unscheduled half-point reduction Oct. 8. Bank of Canada Governor Mark Carney said further monetary stimulus will likely be required.

Carney said the credit crisis, a slowing global economy led by a sputtering U.S. economy, and a sharp sell off commodities are having a profound impact on Canada.

Carney said the country's economy will contract by 0.4 percent in the October-December quarter and post zero growth in the first quarter of 2009.

"Economic growth in Canada has slowed abruptly this year," the bank said in its quarterly outlook.

Some of Canada's major oil sands companies said Thursday they are re-examining their expansion plans in light of the slowing economy. Suncor Energy Inc. said it has cut its capital spending target for 2009 by more than one-third to $6 billion Canadian. Petro-Canada, UTS Energy Corp. and Teck Cominco said they might defer building an upgraded refinery for its massive Fort Hills oil sands project, which is expected to cost over $20 billion.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.