Canadian economy mostly unscathed by global financial crisis

TORONTO — While the United States reels from the global financial crisis, with credit markets still frozen and stock prices careening from highs to lows, Canada has remained relatively insulated.

Canadian banks have not gone shaky like their American counterparts, economists and other experts said. There is no subprime mortgage or home-foreclosure mess. And while the United States fears a prolonged recession, Canadians have remained relatively sanguine, convinced that they are in a good position to weather the economic tsunami from the south.

"We will be pulled down," said Michael Gregory, chief economist at BMO Nesbitt Burns, an investment firm. "Not as deep, not as long."

Fears about the global crisis helped Prime Minister Stephen Harper increase his Conservative Party's presence in Parliament in Tuesday's elections, many analysts here believe, though the party still fell short of an absolute majority.

Harper called the election in September, just before the crisis hit. After some initial verbal stumbles — he at first seemed to play down the fall of the Toronto exchange — he campaigned as the steady hand to see Canada through hard economic times ahead.

Polls showed that the economy was the main issue in the election.

The main reason for optimism here is the banking system. Experts here note that Canadian banks are more tightly regulated, more liquid and less highly leveraged. Instead of being highflying investment banks, they tend to operate in a more traditional manner, with lots of loyal depositors and a solid base of capital.

"I think the regulatory framework in Canada is a little more stringent," Gregory said, "and Canadian banks are a little more conservative in terms of lending." The World Economic Forum this month rated Canada's banks as the world's soundest, ahead of banks in Sweden and Luxembourg.

According to the Canadian Banking Association, one reason for the system's solidity is that banks are national in scope. Each of the largest five institutions has branches in all 10 Canadian provinces, meaning they are less susceptible to regional downturns, and they can move capital from region to region, as needed.

Strict rules also govern mortgage lending. By Canadian law, any mortgage that will finance more than 80 percent of the price of a home must be insured. Two-thirds of all Canadian mortgages are insured by the quasi-governmental Canadian Mortgage and Housing Corp. As a result of the tough standards for insurance, "people tend not to get mortgages they cannot afford," Gregory said.

Defaulting on a loan is also more difficult in Canada than the United States, Gregory said. "You can't just drop off the keys and walk away."

Another difference is that in Canada, mortgage interest is not tax-deductible, making it harder to buy a house. As a result, Canada did not have as strong a construction surge as the United States did during the boom years, and thus does not now have a big oversupply.

But Canada's economy has not been entirely trouble-free. The Toronto Stock Exchange is down. The slowdown in the United States — which takes 80 percent of Canada's exports — has a direct impact here. In particular, the American housing troubles have hurt because much of the wood in new U.S. houses comes from Canada.