Financial Update

Loonie falls like a stone with biggest one day drop on record
Ottawa boosts effort to fight spreading global credit crisis-adds another $50B to mortgage purchase program
· TSX -501.53pts (Reuters)
· DOW -411.30pts The tumbling markets are a combination of overall concerns about the slowing global economy and some of the economic developments and weak retail sales coming out of the United States, said Norman Raschkowan, chief investment officer at Mackenzie Financial Corp
· Dollar -2.77c to $80.81US. the biggest one-day drop on record at the Bank of Canada and surpassed the 2.69-cent fall on Oct. 10. Currency watchers say the loonie and other resource-linked currencies are being driven down by falling prices for commodities such as oil, metals and minerals and by global economic uncertainty
· Oil -$3.17 to $56.16US per barrel.
· Gold -$14.50 to $718.30US per ounce
(Reuters) U.S. Treasury Secretary Henry Paulson announced changes to the US$700-billion rescue plan for troubled financial firms. The markets may be "expressing its disappointment" that the treasury department appears to be moving away from the initial intent of relief program. Paulson said the program will not be used to purchase troubled mortgages and other assets from banks as originally planned, but the U.S. government will continue to invest banking companies to provide them with the capital they require to weather the credit crunch.
"So it sort of begs the question of how we're going to establish a market for these distressed assets and that may be contributing to some nervousness," Steve Malyon a Scotia Capital currency strategist said.
Ottawa boosts effort to fight spreading global credit crisis
RICHARD BLACKWELL AND HEATHER SCOFFIELD Globe and Mail Update
TORONTO — Ottawa has announced three new aggressive measures to get Canada's credit markets back in working order.

Finance Minister Jim Flaherty said Wednesday in Toronto the government would add $50-billion to its mortgage purchase program. He has also agreed to slash the price the government is charging to Canadian banks to insure their wholesale lending.

At the same time, the Bank of Canada is injecting another $8-billion into money markets over the next few weeks, in one-month money, through a new Canadian-dollar term lending facility it is setting up.

“Canada has stepped up to the plate in a major way this morning, announcing three major new actions today, all designed to crack the nute that is the credit crunch,” commented Eric Lascelles, chief economic strategist at TD Securities.

Ottawa “has introduced programs that should contribute to a notable narrowing in financial institution credit spreads, and possibly in credit spreads overall,” he said in a note to clients.

Mr. Flaherty's announcement means the government will now buy up to $75-billion of insured mortgage pools from the major banks, up from $25-billion.

He told reporters he made the move because he now expects an “extended period of stress in global credit markets.”

In addition to increasing the amount of money available to buy mortgage debt, the Department of Finance also slashed the price it will charge banks for guaranteeing their loans.

Commercial banks have complained loudly that the loan guarantee program designed by Ottawa a few weeks ago was too expensive to be of much use.

While other countries' banks could buy what amounts to insurance at a low price, Canadian banks were paying higher rates. The program was only useful for banks in dire trouble, and was putting the Canadian financial institutions at a competitive disadvantage globally.

In Ottawa, the Bank of Canada said it will put an additional $8-billion into one-month money markets, spread out in four auctions over the next few weeks, through a newly created Canadian-dollar term loan facility.

The Bank of Canada has hinted heavily in recent weeks that it had further measures in store, to make sure financial institutions have cash on hand to finance their transactions.

Financial institutions can post almost any kind of loan on their books as collateral, in order to take part in the auctions, the bank said.

“By providing greater flexibility for liquidity provision with respect to eligible collateral, the [new facility] will facilitate further improvement in money and credit markets.”

Canadian banks have been pressuring Ottawa to boost their help for the sector, and all countries have been urged, in a series of international meetings, to do much more in order to get the global economy back on track.

While lending spreads in some markets have edged down gradually in the past few weeks, Canada's key spreads have not moved much for a month, suggesting a lingering risk aversion among banks in Canada.

“At a time of considerable uncertainty in global financial markets, this action will provide Canada's financial institutions with significant and stable access to longer-term funding,” Mr. Flaherty said in a statement. “This extension of the program to purchase insured mortgages will further support the availability of credit, which will benefit Canadian households, businesses and the economy. In addition, it will earn a modest rate of return for the government with no additional risk to the taxpayer.”

Mr. Flaherty indicated last weekend that he understood the banks' complaints, and would consider acting. But Bank of Canada Governor Mark Carney said in an interview Ottawa had carefully designed the program, and suggested Canadian banks weren't at a global disadvantage because they are in far better shape than other banks around the world.