Finance Minister Jim Flaherty announced Friday that the federal government will buy $25 billion worth of mortgage debt from Canadian banks in a bid to stabilize the lending industry and encourage lower interest rates.
Due to the subprime mortgage crisis, financial institutes are reluctant to lend money, and if they are, they’re charging significantly-higher rates. Consumers are not the only ones affected by higher interest rates. To recoup losses, banks will likely have to increase their lending rates to businesses, which will further serve to stagnant business growth in Canada. To compound the problem, banks have ceased to trust one another and letters of credit backed by once-revered global banks are not carrying any weight at the moment. Some companies have managed to get around the problem by using alternative financing, but in some areas, trade has dried up completely.
The cash infusion into the banking system should ease pressure on lending institutions and prompt banks to lower their interest rates. Hopefully, this will be sufficient get business back on track.
