Our boring banks never looked better

Canada’s fiscal framework is the best in the G7, with the lowest deficit and debt ratios in the club

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Sun Media, Friday, November 4, 2011

Jim Flaherty was saying the other day that he wanted to see “more resolution in Europe before we proceed with the fall economic update.”

And resolution is what the world got Thursday, as Greek Prime Minister George Papandreou capitulated to intense pressure and called off a referendum on the latest euro bailout package.

A referendum hadn’t been in the cards when the latest rescue package was announced last week, and it wasn’t by the time German Chancellor Angela Merkel and French President Nicolas Sarkozy got finished with Papandreou after they called him on the carpet Wednesday night on the margins of the G20 summit meeting in Cannes, France.

About the bailout, they told him, take it or leave it. About a referendum, he replied, just kidding.

Papandreou certainly got everyone’s attention. There was no prospect Greeks would approve a package that promised more debt, more austerity and fewer entitlements.

In defeating the bailout in a referendum, Greece would have defaulted on its debt and exited the 17-nation euro zone.

The ripple effect of consequences for the euro, and the global economy, can only be imagined. Flaherty has been urging the Europeans to “overwhelm the problem,” by throwing as much liquidity as necessary at it. And one trillion euros to prop up Greek and Italian positions is a real number. But whether it’s enough remains to be seen.

Flaherty has also been saying European banks would have to take a haircut on their Greek debt, and last week they finally agreed to take a 50% write down, up from 20%. Again it was a question of take it or leave it from Merkel to the banks, when she told them global events would be on their heads.

Canada is in a position of real leadership at these summit meetings mainly because we have the best story to tell. For the fourth year in a row, the World Economic Forum has ranked Canada the strongest banking system in the world. Five of the six leading Canadian banks are in the top 10 in North America in both assets and market capitalization.

Canada’s fiscal framework is the best in the G7, with the lowest deficit and debt ratios in the club. Not to mention Canada’s job creation record, 600,000 new jobs, coming out of the recession.

Flaherty’s positive narrative accounts for some of his influence, but he’s also a convivial spirit with friends around the table, from U.S. Treasury Secretary Tim Geithner to Christine Lagarde, new executive director of the International Monetary Fund. Flaherty is now the ranking finance minister in the G7, and has hosted G8 and G20 meetings.

Then there’s Mark Carney, the governor of the Bank of Canada, who is about to become head of the Financial Stability Board, leading the drive for bank reforms, especially capitalization and leverage ratios.

What would Carney make of Jon Corzine, his onetime colleague at Goldman Sachs, who went on to become a New Jersey senator and later its governor, before returning to Wall Street to run a firm called MF Global in 2010?

Before declaring bankruptcy this week, MF Global bought $6.3 billion of cheap euro zone debt. The bank was leveraged at 44-1, with $44 billion in liabilities and only $1.4 billion of equity.

Boring Canadian banks never looked better.

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