Finance Committee on Nov. 20th, 2007

[Dr. Jayson Myers]

Let me go first to explain a few of my comments on the credit situation.

I think the uncertainty in U.S. credit markets is one of the reasons we're seeing a lot more volatility in the U.S. dollar that's also being reflected in the volatility of the Canadian exchange rate. So I think that's a part of this.

I'm hearing two things. Number one, companies exporting to the U.S. are finding that their customers are extending their time of payment. Many are over the 90-day usual terms of payment. Some are finding it more difficult to find the money for payment, particularly in sectors such as the automotive sector, consumer products, and housing. I think those are the three key markets in the U.S.

The second thing I'm hearing is that, of course, banks are a lot more willing to extend credit when cashflow is strong than when cashflow is weak. We've had a number of our members phone recently and say their lines of credit have been reduced and they're now being asked to pay back part of the outstanding line of credit, which is compounding some of the difficulty they're facing right now.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Mr. Drummond.

[Don Drummond]

On the credit crunch, I didn't want to leave the impression from the way you've phrased your question that we are seeing a great deal of difficulty in financing Canadian businesses. We do have weekly statistics on bank loans to the corporate sector, and we've been following those very closely since the credit difficulties began in July. We don't see any evidence that it's going down. There is no evidence that there has been a tightening. The problems are largely with interbank lending, particularly on the short-term side of it. That may, in a minor way, be compounding the problems, but I don't think that's the major part.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Are you agreeing with Mr. Myers or disagreeing with Mr. Myers?

[Don Drummond]

I think what he's talking about, particularly the payments coming from the United States, is quite a bit different. I thought where you were starting is at what we're typically thinking of as the credit crunch as it's falling through Canada and the United States, and asset-backed commercial paper is.... That's largely but not exclusively restricted to interbank loans. It hasn't really affected the corporate sector that much, and as every week comes out, we still have not seen, in through last week—

[John McKay, Liberal, Scarborough—Guildwood, ON]

So huge write-downs by financial institutions are not going to affect credit?

[Don Drummond]

We have not seen the banks—actually either in the United States or in Canada—restrict the availability of credit. The Bank of Canada has estimated that the overall change in credit, particularly the sharp run-up on selected instruments of very short terms is equivalent to about 25 basis points of interest rate tightening. So there is some tightening, but again, relatively small relative to the depth of some of these other problems we've been talking about.

Just on the currency rate, it's absolutely true, the Canadian dollar has gone up more than the trade-weighted U.S. dollar has gone down, and there are two reasons for that. One is the additional lift and just reflecting the mirror image of the U.S. weakness as commodity prices have lifted up certain currencies. Canada, having commodities, has been one of them. The Australian dollar experience has been fairly similar to the Canadian experience because it also has commodities.

The second one just relates back to what I said before. We have huge blocks that are quasi-fixed with the United States, mainly China. It has moved only 9% over the last year and yet it has the biggest trade surplus with the United States. I would argue that for their own purposes they should let their exchange rate appreciate, but if they did, that would take some of the pressure off these free-floating currencies.

[The Chair, Conservative, Rob Merrifield]

Thank you.

We'll now move on to Monsieur St-Cyr.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

I would like to thank you all for coming.

I would like to ask Mr. Lemaire a couple of questions. I really appreciated your presentation, in part because it was in French, which is a rather rare thing here at the Standing Committee on Finance, and in part because you told us about the importance of setting up a greenhouse gas emissions trading exchange. The Bloc Québecois has, for a long time, been talking about the need for proceeding with the Kyoto Protocol, setting binding objectives and absolute greenhouse gas reduction caps for environmental reasons, since we need to take care of our planet and because this carbon exchange creates new economic opportunities for our companies.

The government has always responded by saying that in fact absolute targets for reducing greenhouse gases pursuant to the Kyoto protocol would be, for all intents and purposes, an economic catastrophe. However, I have heard what you are saying. You are a businessman, you want your company to be profitable and I would imagine that you see this as, on the contrary, an opportunity to do business.

I would like you to explain to us, in greater detail, how this carbon exchange would be, in your opinion, a real business opportunity for Quebec and Canadian industries. You also talked about the fact that this carbon exchange would be in Montreal. Why do you think that Montreal should be the location for such a carbon exchange?

[Laurent Lemaire]

We are not talking just about principles, but we are basing our opinion on our experience. Europe has a carbon exchange. We have plants in Germany, Sweden, France and in the United Kingdom. We experienced the establishment of this exchange. It was very beneficial for our sector. We complied with the requirements, we reduced our emissions and that enabled us to trade credits with other companies that had to pay in order to reduce the volume of their carbon emissions. This is something that has been tried and proven to work well. It will continue next year. The European Union set it up for a limited time period, but it will begin again in January. I think that this is a good example to follow for two reasons: first of all, we must make it advantageous for those companies that comply with the regulations or objectives; secondly, we must penalize those who pollute, so that they pay a bit more.

In Canada, it is the oil industry that pollutes. It should be up to them perhaps to pay a little bit for those who are better corporate citizens and reduce their greenhouse gas emissions. That is the point we have reached. It can take some time to set up such a measure. Many people want this type of thing in the near future.

I think that it would be better to set up this exchange in Montreal rather than in Calgary. We are a little bit more aware of the environment. We have expertise in this type of thing, which would ensure that the carbon exchange would be effective and operational.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

My second question is for Mr. Myers. You spoke about the problems associated with the high Canadian dollar and its rapid fluctuation. For example, you sign an eight-month contract, but the Canadian dollar is worth something completely different by the end of this eight-month period.

The Bloc Québécois has for a long time been advocating the idea of having a single currency in North America, with the United States, to avoid all of these fluctuating exchange rate difficulties. Even though this may not be a solution to the structural problem referred to earlier, do you feel that, for the manufacturing sector, a common currency would alleviate part of the problem caused by the unpredictable fluctuating dollar?

[Dr. Jayson Myers]

Certainly the fluctuation in the exchange rate, the volatility of the exchange rate, and the rapid appreciation of the exchange rate are very difficult problems to manage. It's not the fact that the dollar is at par or is at $1.10--companies can adjust to that--but it's that rapid volatility.

But if you are looking at issues around a monetary union, our members would probably have various ideas about what level we should peg the currency at. I'm sure there are a number of companies that would have loved to peg the currency at 62¢ U.S., but in so doing we'd be locking in a very low rate of productivity as well. At $1.10, I'm sure other people would have different views about the currency's level.

So I think there are a number of good economic reasons why we would want to keep a currency that is unique, a currency that can adjust to Canadian economic circumstances. But clearly, we're in unusual circumstances in Canada and the United States right now.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Now we move on to Mr. Dykstra.

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you, Chair.

I have five minutes, so I'm going to ask you all to answer a question, and hopefully it can be yes or no. If it can't, just pass on the question. I'll try to give you a little bit of time at the end of my time allocation for you to be able to respond.

One of the big questions that a lot of folks ask, and I'd like to ask you experts, is, do you think the government should actually wade into the Bank of Canada and pressure it to lower the Canadian dollar in accordance with the United States? Yes or no?

Let me just go down the row of witnesses and get a response.

[David Adams]

Are you looking for a yes or no answer?

[Rick Dykstra, Conservative, St. Catharines, ON]

Yes.

[David Adams]

I'm going to pass on the question.

[Some hon. members]

Oh, oh!

[Rick Dykstra, Conservative, St. Catharines, ON]

Mr. Stanford.

[Dr. Jim Stanford]

The government should negotiate with the bank over how it manages its inflation-targeting mandate. I don't think it's an either/or situation.

[Rick Dykstra, Conservative, St. Catharines, ON]

Mr. Myers.

[Dr. Jayson Myers]

I think the bank should reduce interest rates, but there should be absolutely no government intervention.

[Rick Dykstra, Conservative, St. Catharines, ON]

Monsieur Lemaire.

[Laurent Lemaire]

Yes, it should.

[Rick Dykstra, Conservative, St. Catharines, ON]

Mr. Drummond.