Canadian Dollar Chaos

William B. Z. Canada g7research@eol. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. 1958Canadian Dollar Chaos 2001 Political Structure and Technological Change 2001 The Pound Sterling Chronicals 2001 The Regal Dollar 2001 World Money Guide 2001 ISBN 978-0-9809085-0-3 G7 Books . Z. Published by G7 Books First published in 2001 Books by Vukson..Canadian Dollar Chaos. All rights reserved.. Ontario. Copyright 2001 by William B. Vukson. Printed in Canada.

. . December 18. . . . . . . . . . . . . 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 First Quarter: December 15. . . . . . 1995 . . . . . . . . . . . . 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1992 . . . . . . . . . . 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Two Crises: The Peso and the “Northern Peso” . . . . . . . 1994 . .43 Second Quarter: March 19. . . . . . . . . . . . . . . . . .105 Second Quarter: April 28. . . . . . . . . . . . .51 First Quarter: 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69 First Quarter: February 10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Canadian Dollar Chaos CONTENTS Foreword . . . . . . . . . . . . . . . . . . . . . . . .88 Third Quarter: September 24. . . . . . . . 1992 . . . . . . . . .32 First Quarter: March 21. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97 First Quarter: January. . . . . . . . . . . . . . . 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 First Quarter: February 14. . . . . .83 Third Quarter: July 26. . . . . . 1992 . 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1994 . . . . . . . . . . . . . . . . . . . . . . 1992 . . . . . . . . . . . . . . 1994 . . . . . . . . . . . . . . . . . 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 Third Quarter: July 16. . . . . . . . . . . . . . . . . . .8 The G•7 and Exchange Rates . . .78 Second Quarter: June 6. . . . . . . . . . . . . .101 Second Quarter: April. . . . . . .36 Third Quarter: July 24. . . . . . . . . . . . .93 Fourth Quarter: November 25. .109 . . . .4 Canada and the Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62 Third Quarter: September 25. . . . . . . . . .38 Fourth Quarter: September 11. . . . . .48 Fourth Quarter: October 12. 1992 . . . . . . . . . . . . . . . . . . . . . 1995 . . . . . . . . . . . . . . . . . . . . . . .58 Second Quarter: April 22. . . . . . . . . . . . . . 1996 . . . . . . . . . . . . . . . . . . . . .13 Markets over Politics . . . . . . . . . 1996 . . . . . . . .74 Second Quarter: March 30. . . . . . . . . . . . . . .34 Second Quarter: May 21. . . . . . . 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 The Northern Peso . 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1993 . . . . . . . . . . .65 First Quarter: January 5. . . .24 Trapped in Asia! . . . 1996 . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . 1999 . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129 First Quarter: January 30. . .143 March/ April. . . . . . . . . . . . . . . . . . .145 May/ June. . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131 Second Quarter: June 19. . . . . . . . . 1997 . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . .139 Fourth Quarter: October 8. . . . . . . .113 Third Quarter: August 7. . . . . . 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Third Quarter: June 18.155 iv . . 2000 . . . . . . . . . . . . . . . . . . . . . . 1997 . . . . . . . 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149 September/ October. . . . . . . . . . .127 Third Quarter: September 29. 1996 . . . . . . . . . . .133 Third Quarter: September 20. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 . . . . . . . . .147 July/ August. . . . . 1996 . . . . . . . . . . . . . . . . .137 Second Quarter: May 9. . . . . . . . . . .151 November/ December. . . . . . . . . . . 2000 . . . . . . . . . . . .141 January/ February. . . . . . . . . . . . . . . . . . . .135 First Quarter: January 16. . . 2000 . . .118 Fourth Quarter: October 2. . . . . . . . . . . . . . . . . . . . .153 November/December. . 1998 . . . . . . . . . . .122 Second Quarter: June 3. . . . . . . . . . . . . . . 1998 . . . . .


” was derived from an international monetary economics course that I attended and which was taught by Professor Michele Fratianni.” Asked where it would stand one or two years from today. perhaps one that brought to the table a rare combination of both academic and theoretical grounding. Under this method of analysing currency markets. nor was there any strategy to pursue long term risk management of fluctuating currencies. The name. In fact. In this respect. not to mention the currency markets. let alone in predicting the rise and progress of this new high tech world. with an unprecedented combination of global markets and technological invention. Yes. nor was it sufficient to rely on just many years of “experience” within a particular sector of the economy. To be an effective leader or strategist in the 1990s. Very few Economists in the early years of this decade predicted what has transpired via the internet.G7 Books FOREWORD The G•7 Report Project came about unexpectedly. “The G•7 Report. the past decade proved to be one of the most revolutionary periods in the twentieth century. I felt that a new communications forum was needed that would bind together an inter-disciplinary approach to the new developments and challenges faced in this emerging new decade. trade and merchant banking. it was not enough to just be a specialist within a narrow area of expertise. nor has the profession been too adept at charting the long term trends that have been emerging in global stock markets. Of interest was how both fiscal and monetary policy was formulated within the industrial grouping of the most powerful economies in vi . Even within the confines of the “new high tech economy” a great deal is lost in trying to understand the longer term trends that are in play. combined with unequalled practical know-how. research and documentary journalism that yearned for direction from a unique type of leader. most have dismissed trends in currency markets as belonging within the sphere of the random walk. After having spent many years in academia. not to mention a good friend of mine. on the latter point. the 1990s. the new orthodoxy in the 1990s was the random walk. an expert on exchange rates and interest rates and former Chief Economist of the European Commission in Brussels and a member of the Council of Economic Advisors in Ronald Reagan’s Administration. the quick reply would have been “the same as where the relationship has stood at the close of business today. the answer would amazingly have been the same. the academic approach to economics and world business was deprived of what John Kenneth Galbraith once termed as “practical good sense” evident in great abundance throughout the revolutionary 1990s. As things turned out. All of this called for a fresh new start in media. Asked where the dollar-yen parity may be tomorrow or one month from now. there was no way to predict the short term daily or hourly parities between two currencies.

or inflation. the disruption as reflected via fluctuating exchange rates would be kept to a minimum. the serious financial press is full of reports of disappointing earnings results due to financial hazards that have impacted subsidiaries in various parts of the world. To break from the pack in such a manner. During the transformation of Russia and the former communist countries of central and eastern Europe. it was trade concerns which were at the forefront of the policy debates. politicians in France broke with their G•7 counter-parts in order to pursue a massive re-inflation which ultimately proved very short-lived. In simple English. but that the ensuing price increases. through George Soros’ glorious victory in ejecting the pound sterling out of the European Exchange Rate Mechanism. many have argued in favour of a concerted G•7 expansion in spending and their creation of a more global demand that would in turn assist in the transformation to a market system. the interaction between them. However. which was the prelude to the present day single currency. and the emerging market countries in particular. the French franc nose-dived in global currency markets as inflation skyrocketed upwards. Not only were such policy directions between the world’s most powerful economies vital in understanding how business cycles interact between these countries. The initial attempts to co-ordinate official demand-creation activities within the G•7 have been motivated to a large extent on purely trade grounds. the “Mitterrand experiment” exacted great inefficiencies on fellow member G•7 nations and had limited real impacts on the domestic French economy. Liberalised capital mobility and the burgeoning “herd-mentality” lead by some well known hedge-funds is a phenomenon that arose in the early 1990s. if all of the members of the G•7 were expanding fiscal spending or lowering interest rates in concert with one another. This would be of particular benefit to all parties transacting international business. choked off the gains that buyers would have had from the lower franc. in the mid 1980s. After Francois Mitterrand’s Socialist Party took power in 1981. the hey-day of G•7 policy co-ordination exercises. but a collective decision to increase spending or to lower interest rates exacted a real impact on the global economy.the Euro. This criticism remains valid as trade and investment flows from the G•7 to the newly emerging vii . Mitterrand quickly retreated from this approach and agreed to become a team player thereafter. In short. since strategy and planning within organisations find it most difficult to hedge the effects of gyrating exchange rates. The Mitterrand government quickly learned that individualistic approaches to policy were dead ends. and that the short-lived expansion quickly made the exchange rate attractive to foreign buyers. and the effects a particular direction would have on the emerging market group of countries that border these powerful G•7 nations.Canadian Dollar Chaos the world. On many occasions.

We counted very limited success in soliciting advertising support. We retained some leading contributors over the years. In essence. but also introduced numerous writers that would normally not have had the opportunity in the commercialised or market-driven media to express their views and communicate with our readers. has been disappointing.” The G•7 Report project was particularly foreign to advertisers. In short. and to his counterpart in Canada. The problem that any “niche” publisher must go through is retaining a core group of supporters over the long term.G7 Books market economies and vice-versa. The G•7 Report made and shaped its own following and market over the years. We became known as a media that was made available to some leading European based journalists such as Italian based organised crime expert. but was never able to develop a following in places such as Vancouver or Atlanta. Toronto and Montreal. the Montreal Stock Exchange. The G•7 Report project attained a small “niche” circulation in major North American cities such as New York. Among this select group. The G•7 Report project was not just about economics and business. Furthermore. The G•7 Report project was not something that was developed by marketers residing in New York. Antonio Nicaso. However. throughout 1995 and 1996 we were also available over the retail newstrade in the City of London at selective newsagents. In fact. NatWest Markets and Kapital Trade as our core group of advertisers. such as Harvard Professor Benjamin Friedman. John Pattison. Lee Lamothe. especially among the agencies in Toronto. and agency calls and presentations tended to border on the absurd. Boston. the former head of the crime section of the Toronto Sun daily newspaper. we are very grateful to Ford Motor Company. Most of the major corporate supporters were much appreciated. Moreover. I did not “measure” or “test” the market with this concept before launching the product. Belgian Senator and leading international trade Economist Paul De Grauwe and compliance and regulatory expert Dr. Toronto or Los Angeles. but was a new vehicle that introduced a number of journalists and commentators unfamiliar to the readers of the daily news in major North American cities. The G•7 Report was simply not a concept that was welcomed within this realm. Mr. then the publication either dies or gets transformed over the years. San Francisco. It was a leader which was embraced by a very loyal grouping of reader. Los Angeles. If this can not be maintained. yet very rare. I would be the first to stick my neck out and say that this was among very few recent launches which went the other way around. it was interesting to note that we did not deviate much from our core viii . that felt that we had important things to say about global trends and the rising “new economy. hence prolonging the transformation process and creating more hardship than what would have been otherwise necessary. We greatly relied on the latter technique to ensure our survival. Miami.

Since 1992. to a newsprint version and ending with the current newsletter look.Canadian Dollar Chaos group of readers. we went from an academic-looking journal to an expensive full-glossy magazine. regardless of the format of The G•7 Report. and for this we thank them for their ongoing and unbending support. William B. Vukson ix . We found that the constant throughout this entire process of transformation in design were our core readers over the years.Z.

which held large reserves of heavy thick oil that was difficult to refine and distribute.S. resource-rich countries such as Canada. The Cold War system of fragmented regions. Ultimately. This occurred during the era of pegged exchange rates around 1970. was very much reflected by its actions in the oil and gas market. the Clark government was defeated in a non-confidence motion over gasoline. Canada and the Soviet Union were comparable to one another from the perspective of size and resource richness during this time. the Canadian dollar was actually a few pennies stronger than its U. restricting foreign direct investment inflows and keeping a suspicious eye on what was happening south of its border. inciting massive protests. During this period. politics and economic policy was formed under the premise that Canada was a closed country. Canada became even more attached to the U.S. and the massive investments in energy exploration conducted in the northern arctic regions. and that the period of rising oil prices could effectively be shielded from consumers by regulating the international market and creating what became known as a “made in Canada” price for a barrel of oil. For most of the inflationary 1970s. CANADA AND THE DOLLAR The 1970s were also an era of large-scale capital projects. The posture which the Liberal government of Pierre Trudeau opted to pursue during this time. and the Liberals under Pierre Trudeau were once again resurrected from defeat. Often.S. dollar. The 8 . A long time ago in the 1970s. when it introduced a budget which pushed local gas prices closer to world market prices. The Conservative government of Joe Clark was in power less than a year in 1979. was very friendly to large. Even local governments were singularly defeated over their pricing policies with respect to gasoline and energy.T he 1990s have been even less kind than the 1980s to the Canadian dollar relative to the U. for a very short period of time. as the natural allure of a boom created by deficit spending by the Reagan Administration was very difficult to resist by most Canadian manufacturers. During the 1980s. in contrast to the resourcepoor countries which needed to struggle with ridiculously high energy and commodity prices. just before the Bretton-Woods system was completely abandoned during the time of the Nixon administration. Canada pursued a nationalistic economic policy. as exports as a component of overall income grew to about one-third. counterpart. market. The 1970s were very much a decade where commodity-producing countries were left in a respectable strategic position. Investors came to view these countries as carrying a real premium. such as the Alberta tar sands. based on the high standard of living that such an abundance could bring.

resulted in a dollar which was weakening in relation to the U.S.S. The low dollar politics took on an inertia over the 1980s that was difficult to reverse. the Conservative government of Brian Mulroney sensed that an era of more open global commerce was upon us..S. However. the activity on the capital account of the Canadian dollar worked against it.S. More and more. were 9 . and that Canada would do well in moving quickly to protect its most vital market. and abroad kept a steady demand for the Canadian dollar low. driven by advances in high technology and communications. this was difficult to imagine. as travel to the U. and politics took on a more Conservative bend. such as certain grades of oil and natural gas to the U. very soon there was an unstoppable inertia which swept in formal free trade arrangements with the U. dollar. as the U. Cold War strategic interests also prevailed.S. especially during the years of the OPEC oil embargo in the late 1970s.boom-time conditions after the interest-rate induced recession in 1980. as the Liberal era of Pierre Trudeau was swept aside. the U. understood that without easy access to their vast market by Canadian exporters. the collapse of Communism began to tie all of the “emerging market” countries together now in a single global marketplace.S.S. Under the period of emerging globalisation in the 1990s. Congress constantly received opposition from their constituents who had to deal with very competitively priced Canadian exports. even though many Senate leaders in the U. market. since Canada was a net exporter of energy products. resulted in the dependency ratio rising in relation to the U. Why did this happen and can it be explained by economic logic? If the Canadian dollar was dependent on the balance of trade during the 1970s. needed Canadian co-operation in order to patrol the northern reaches of the arctic for any Soviet intrusions that could threaten the United States directly. every administration in the U. the United States. one-third of all incomes could potentially be affected in some way. Canadian Dollar Chaos The difference between the two dollar parities in the period of the Cold War. when compared to the era of emerging globalisation in the 1990s. Despite constant agitation among the Senators representing border states. was that the Canadian dollar began to track the deflating prices of commodities in the latter period. After the collapse of the Bretton Woods system of currency pegs in 1972. was on a long term trend downwards. especially when rising oil prices during the 1970s. market. the Canadian dollar was on an unending downward spiral in relation to the currency of its most vital trading partner. This behaviour was not obvious during the Cold War period. Aside from the local rhetoric in opposition to free trade with the U.S.S.S. However. dollar. as many of its G•7 counterpart currencies were.S. then it made sense only if the trade balance with the U. In addition. This started the new decade off with a challenging dose of “disinflation” as Canadian commodities that were priced in international markets. despite this.

along with an aggressive pro- 10 . and the world financial system. it is interesting to note how gold has behaved in the era of globalisation.G7 Books now being challenged by continuously lower-priced commodities of the former Soviet Union countries. The Canadian dollar went down with the price of commodities.S. took the unprecedented step of seeking help from all major global commercial and investment banks. and one of the most dangerous financial risks since the collapse of Barings bank. Even an aggressive reduction in short term interest rates engineered by the U. cents. but it was also very plentifully available from Kazakhstan and Azerbaijan. and Canada was distinct among G•7 countries for being the most vulnerable to such a crisis originating in the newly-emerging markets. cent point very briefly during the very close Québec Referendum of 1995. the newlyemerging markets of the old Soviet Union. As a general gauge of inflation over history. As the Asian crisis hit in 1997. not to mention the Arab countries.S. So severe was the potential impact on the U. Not only was world market oil and gas production now located in Alberta and the North Sea. This was also the pattern for many other basic commodities that were traditionally mined. The leverage that LTCM amassed was so great. the ensuing emerging markets crisis in 1997 was notable from the perspective that the Canadian dollar was taken down simultaneously with the Thai Baht. and the individuals so influential to have received so much credit backing. sending prices lower and battering the price of gold well below three hundred dollars U. Nobel prize winners Merton Miller and options pricing theory guru Myron Scholes were among the partners in the speculative fund that took positions based on historical financial relationships in the markets confirmed over time. also affecting some members of the G•7 and Canada in particular. Indonesian Rupee and the Russian Rouble. and adopting the unofficial “Northern Peso” label from those most critical of its recent performance. to exert an overall impact on lower and declining prices in general on a basket of commodities. Federal Reserve. as disinflation in some countries combined with outright deflation in others. that Federal Reserve Chairman. for the remainder of the decade.S. it spread to Russia and the central European emerging market countries in the fall of 1998. which was directed by a group of star nobel prize winning academics and famed New York trader John Merriwether. and at the same time created an unprecedented situation of panic. The slide in the Russian Rouble preceded one of the biggest financial crises that the New York banking brethren has seen. that a turn for the worse during the emerging market crises stood traditional relationships on their head. could not save the Canadian dollar from its slide towards sixty U.S. I refer to the near collapse of the Long Term Capital Management (LTCM) fund. as it pushed to record low levels inviting criticism along the way from commentators.S. Alan Greenspan. Having dipped below the important seventy U. History was made.

and world financial markets. Martin quickly orchestrated a campaign to remove Crow from the Governorship of the Bank. Furthermore. It also brings into question the entire trend in the 1990s of independent central banks pursuing their own agendas among the industrialised and advanced G•7 countries. In essence. Canadian Dollar Chaos The 1990s began with a crisis at Canada’s central bank. were now far more competitive in global markets after the Rouble’s collapse. combined together. The election of the Liberal government of Jean Chrétien in 1993. was a devout monetarist and inflation fighter. much to the surprise of many investors. as an inflation-fighting institution. appointed during the era of Brian Mulroney’s government. than they were on Wall Street. Governor John Crow. what was at stake under the Crow episode. elevated the comments of Finance Minister Paul Martin Jr. fighting inflation. which was supposedly independent. Immediately. that was too singularly focused on one thing. This policy was implemented by a combination of high real interest rates and an appreciating dollar.gram to reduce short term rates. which were very much anti-Crow and against the Bank of Canada’s uni-dimensional pursuit of fighting inflation. and several “double-dip” recessions thereafter. and add liquidity to U. The crisis in Russia was particularly troubling. to have a double dose of rigid central bank independence. was the entire concept of the role of an overly-independent central bank. Such an event would destroy the consumer confidence that was so difficult to rebuild after the early 1990s commercial property crash.S. He pursued an aggressive policy which was designed to enhance the credibility of the Bank of Canada. The severity of the downturn in the early part of the 1990s. calling for a lower dollar in order to compete on international markets. was a good enough reason for the government to reject the harsh monetarist policies of John Crow. Despite this crisis in New York. under a period where technological change would have made the entire concept of fighting inflation somewhat redundant anyhow. The fears being that the deflation-ravaged domestic Canadian economy was about to absorb yet another dose of confidence-shattering crises. when rapid technological changes in the latter half of the decade would have been a natural hedge against price increases anyway.. as well as technological change and heightened levels of competition. which was impacting the bottom-lines of the all too-important exporters in the manufacturing sector. as many commodity exports such as oil and gas. in the form of Gordon Thiessen. the metal-based commodities that Russia exported impacted the Canadian economy directly. the consequences were felt more in the Canadian currency and stock markets in Toronto. was just too much to handle for some countries like Canada. the Canadian dollar followed the Rouble. However. Baht and Rupee downwards. Just how independent is the Bank of Canada? It is independent only up 11 . in favour of a mild-mannered career central banker.

not only among the G•7 countries. 12 .G7 Books to a certain point. but also among the emerging market countries which so much aspired to inherit independent central banks and sound currency policies. as the Crow affair ran so much against the mainstream investor logic on central banking independence. With an ailing economy for most of the 1990s. foreign investors also reacted with dismay. In this case. political expediency ruled the day. as the Liberals so vividly illustrated via the Crow affair. in the early part of this new decade of globalisation. and with constant attacks on Canada’s standard of living from abroad via the global marketplace. It can be argued that the continuing structural weakness in the Canadian dollar. was also very much due to the interference that the Liberal government chose to implement against the Bank of Canada.

Germany. with the latter inclusion of Russia. must be traced back towards the development of the Bretton Woods System of pegged exchange rates after the second world war. inflationary expectations would be the same in all of the G•7 countries and there would be no real effect on exchange rates. Whereas the former two are formal agreements to coordinate monetary policies and inflation rates by fixing exchange rates. there is no enforcement mechanism that forces its members to pursue monetary policies based on some form of pre-arranged fluctuation band for the group of currencies. Where Bretton Woods ended off in 1972. In short. However.. then the yen could appreciate by ten percent relative to the dollar. hence distorting investment and trade. euros. John Maynard Keynes. Only for a very brief period of time since its creation. Adverse exchange rate movements distort international investments. It was as early as 1959.. Italy. if the G•7 decided to expand money supply by ten percent. have always been a fiscal and monetary policy information forum. did the G•7 actually co-operate to co-ordinate the direction of economic activity. no such formal agreement exists within the G•7.K. Canada. If the G•7 moved in tandem to expand money supply by ten percent. However. Japan and the U. as well as strategic planning initiatives.The G•7 members including the U. the G•7 is a forum that idealises the concept of coordinating policies in three different trading blocs throughout the world. monetary policy coordination has a long history that predates the famous Schmidt-Giscard d’Estaing agreement to formally establish fluctuation bands in 1978. meaning that money supplies in dollars. The historical development of the G•7.S. during the peak of the Vietnam crisis. Central to the whole concept of policy co-ordination is controlling wildly fluctuating exchange rates among the world’s major industrialised countries. preferring to hold its growth to zero. the European Monetary System tried to take over the function of coordinating monetary policies. and there is no assurance of success. a good beginning would be to co-ordinate fiscal and monetary expansions among a grouping of countries. and was influenced by one of the most well known economists in modern times. it should be avoided. with the exception of Japan. given that no member is obliged to follow the final communique’s that are issued at the yearly summits and through the more informal gatherings of Finance Ministers throughout the year. yen and pounds sterling went up by ten percent. that the European Parliament pro- 13 . France. Both the Bretton Woods system and the European Monetary System are fundamentally different from the G•7. In that respect. while creating uncertainty and project delays. Based on the premise that it is good to control the fluctuation of exchange rates. This latter unco-ordinated approach would cause havoc in global currency markets. pound sterling and the euro. THE G•7 AND EXCHANGE RATES Canadian Dollar Chaos In Europe.

However. Federal Reserve system for the purpose of coordinating monetary policies in Europe. and six percent trading bands for other countries that were not considered to have a good inflation record. proposed that the bilateral margins of fluctuation among the EC currencies be limited to three percent. Nixon moved to formally end it on August 15. as the O. the Monetary Agreement of 1958. announced a ten percent devaluation of the dollar. the dollar was based on. to cope with the rising energy costs. which was already in place and functioning. hence formally ending the international experiment of currency management which held together since the second world war. After the crisis with the franc. began to slowly unravel in the 1960s at the height of the Vietnam war and the spending commitments made for the arms race. put enormous strains on the European Community. resulting in the “snake” agreement in 1972. which considered monetary coordination a vital element in furthering the twin goals of political and economic union. the French franc was devalued and Germany allowed the mark to appreciate. gold convertibility at $35 per ounce had virtually ceased. together with the strains of Lyndon Johnson’s Great Society programs. the anchor currency in the Bretton Woods system. created a new initiative that would establish the enduring European Monetary System and a formal Exchange Rate Mechanism (ERM). This lead to several attempts to coordinate exchange rate fluctuations. In 1978. 1971. This was the final solution that eventually yielded a single currency and one European Central Bank. while a wholesale unravelling began the process that would see the eventual demise of the Bretton Woods system.S. At the same time that the European Community decided to “harden” its commitment to monetary coordination practices alongside its commitment to the Bretton Woods system of pegged exchange rates. mark and dollar began to appear. which would govern fluctuations among European member currencies tied to fluctuation bands of 2. German Chancellor Willy Brandt. 14 . By 1968. this was short lived. proved to be too much for the system to bear.G7 Books posed the formation of an institution patterned after the U. However. The European Monetary Agreement of 1958 strengthened the provisions of the Bretton Woods system.C. caused severe fluctuations in exchange rates. German Chancellor Helmut Schmidt and French President Valéry Giscard d’Estaing. chaotic policy initiatives and desperate political manoeuvring in Europe. put forward an idea for monetary union at the summit of the European Council in the Hague in 1969. In 1973.E. oil embargo and the general inflationary environment during the 1970s. The gold standard under which its central currency. the United States itself.P.25 percent on either side of the central parity for some countries. In 1969. the Bretton-Woods system was under severe strains. culminating with the French devaluation and the German revaluation. The demise of monetary co-ordination in the 1960s. when President Richard M.

there did not seem to be any room for any compromise or middle ground either. The fact that globalisation brought naturally diverging responses in the 1990s. Speculative pressures are now far more prevalent than at any time after the second world war. The growing trade deficit in the U.K. which lead to a new trade equilibrium in this turbulent period. hence unwilling to pursue any coherent form of policy coordination that made any sense. For whatever reason. Canadian Dollar Chaos The 1990s have become a decade of open capital flows. while the continental European members were experiencing a boom from German reunification. and was countered with a negative response from the inflation-conscious German Bundesbank. the G•7 never moved to replicate what had existed in the Bretton Woods framework of pegged exchange rates prior to 1969. In essence. Never again has such a high level of cooperation been noticeable. The role of the G•7 is now more important than it was ever before. Canada and the U.S. the G•7’s agenda was a far more informal mandate to loosely exchange information and to act only when periodic financial crises arise in the global financial system. Many have even called for a reinstatement of the old Bretton Woods system. negotiated in New York in 1985.The G•7 has at its core this incredible accomplishment among its European members. made the whole mandate of the G•7 somewhat redundant. which was probably the most disappointing part of the failure to take an active role in policy coordination among the members of the G•7 during this period. Under such a period of “structural” change. automotive accounts with Japan.. and formalised two years later in the Louvre summit in France in 1987. The glory period for the G•7 culminated in the Plaza Accords. Certainly. the G•7 has admitted that what has worked among its European members. can not necessarily be extended to include countries located among three diverse trading blocs around the world. that moved a loose framework for policy coordination. The difficulty with any such For example. budgetary surpluses and less active monetary policies. With deflationary conditions prevalent in the early 1990s. dollar. How could policy be effectively coordinated in light of each country being at opposite ends with respect to its business cycle? Moreover. it would be. and many respected world leaders have called for some form of control in global currency markets. 15 . required a revaluation of the yen and Deutsche mark and the devaluation of the U. it was difficult for these two groupings of G•7 countries to be on the same point in their respective business cycles. were experiencing a sharp adjustment and a severe downturn.S.S. into outright monetary union. if the “Anglo-saxon” group of countries had argued for an expansion in the money supply or in fiscal spending. as the new era of globalisation presented an interesting new set of challenges. the “Anglo-saxon” grouping of countries that included the U. that would be much more far-reaching than the European Union was in establishing the Euro. during the closed economic era of the Cold War.

will inevitably need to disappear over time. however. The hope that remains in coordinating business cycles. but which have the potential to lay a framework for a successful G•7 agenda over the next five to ten years. These are the kinds of “structural” impediments which make co-ordination of policies very difficult. As in the early 1990s. 16 . This kind of coordination is redundant in the world of growing global capital flows.G7 Books moves. is the expansion of the information economy. Germany wanted to see a decrease in spending. while most other recessionplagued countries called for an expansion. which would create severe speculative pressures on currencies if such an imbalance were allowed to proceed at the policy end. even in countries on continental Europe which have realised that the rigid labour structures that have come to define this region. has to do with the divergence of interests of members in terms of where they are in their respective business cycles.

it is a multi-cultural milieu. These would be our primary products on offer along with access to our stock market. although there was an attempt last year by the Chicago Board Options Exchange (CBOE) to trade a similar kind of product. These contracts are useful for any pension fund managers in Canada or elsewhere to ensure that they properly manage their portfolio risks via hedging or specific investments. where people have a very good quality of life. it is an exchange in a city where there is quite a good expertise in trading and portfolio management. because the market was already well-established in Montreal. where we have a listing of most of the large Canadian public corporations. which are our three month Banker’s Acceptance contract (BAX) and our contract on ten year Government of Canada bonds (CGBs). Does the Montreal Exchange have some kind of comparative advantage over other North American exchanges with respect to these two derivative products? These two specific products are traded only on the Montreal Exchange.Z. What would you say would be the comparative advantage that Montreal has as a financial centre in North America? It is a modern exchange that is well equipped with the most state of the art technology to start with. an options market and the futures market. This Why would the Montreal Exchange’s products be interesting to foreign investors or fund managers? 17 . We have the stock market. with good universities and a high quality telecommunications network. Have you tried to model the Montreal Exchange on any other exchanges in the world. President & CEO. and an impressive number of smaller Quebec-based companies. This was eventually de-listed. Vukson When we talk about foreign investors. Moreover. or is it a unique type of institution that is very specific to itself? It is unique in the sense that we have three unique markets all under one roof.MARKETS OVER POLITICS Interview with: Directed by: Rising International Influence of the Montreal Exchange Gerald Lacoste. Montreal has a very good infrastructure from a social basis. we are mainly referring to products that are traded in our derivatives section. Montreal Exchange William B. In addition.

since in most of the other financial centres in the world these are usually operated quite separately by different exchanges. These plans are all currently being discussed. Most if not all of the past Quebec provincial governments have been very supportive of further developing the Montreal exchange. but it is an answer that does not in any way relate to any policy initiatives which the government may have advanced. the answer is no. It also is a question as to how much Canadian debt is being managed among the participants and members of these exchanges? These economic and financial considerations are far more important in deciding any joint venture projects across exchanges. a similar regulatory environment exists among the three making it very conducive for cross-market trading strategies among the traders in Montreal. I think that the current and past governments have been very supportive of our initiatives. the products of other exchanges will be traded in Montreal. Traders are able to move with great ease between each of the three markets and are able to combine strategies between the three. Moreover. Conversely. created a stock saving plan for all Quebeckers. which is the Securities Commission. Overall. This plan together with all of its regulatory aspects was created by the securities industry. which is a good example of government assisting the development of the exchange. This adds multiple trading activities and generates enormous synergies on the Montreal Exchange. than are any issues that relate to cultural similarities. when the Lévèsque government at the time. This would allow our products to be traded in these differing time zones irrespective of the time of day in Montreal. The exchange is a privately owned organisation that is held by its members. The plan was proposed to the government by the Montreal exchange and was supported by a task force made up of various officials. It is regulated by the government through a quasi-judicial body. A very good example of this came at the end of the 1970s. Has the Montreal Exchange made any moves towards formalising co-operative ventures with any of the other exchanges throughout the world? We are making some very loose arrangements with other exchanges in different time zones. In that sense. Have you considered any joint efforts with the Matif in Paris? I don’t think that the cultural similarity or proximity is a good reason for moving towards such arrangements.G7 Books is quite unique. In that sense the government does not have any say with respect to the affairs of the exchange. since it depends more on the type of products that are on offer. and are in progress. Has the new Bouchard government done anything in particular to advance the transparency of the Montreal exchange? 18 .

I am confident that we will be able to successfully develop new products that will come along. All of the regional Exchanges play an important role in channeling capital to their respective companies operating within the region. especially when there exists some kind of complicity between governments. but we have been together with the Montreal financial community over the years. We must remember that this type of Futures market is only about 20 years old and has a very long way to go yet. What is unique about the financial culture in Montreal? We have a lot of enthusiasm in what we are doing. More importantly. This probably makes our consultants far better in tune to the cultural challenges that these countries may pose. We frequently see people from Montreal travelling to these markets for these purposes. involved with emerging markets in terms of support of information and training. They are a gateway for their respective companies that operate in their regions. we are operating through a legal system of civil law in Quebec. to even Is the Montreal Exchange an important fixture to the Montreal economy? Is there any kind of relationship that the Montreal Exchange has with exchanges in emerging market economies? How do you plan to attract such volumes? 19 . There is no official relationship. about 10. because they represent entry points to the global marketplace. even Tokyo cannot be considered as a global exchange due to its restrictions and difficulty for foreigners to operate in. I think this is an asset that we make very good use of. This level of achievement would immediately attract more fund managers and investors. in an anglo-saxon context of business law and we have been able to successfully make a junction between these two systems and cultures.000 BAX contracts are traded daily. This collaboration is very much in place now. but we must create a habit and educate potential users of the benefits of our products that are available. Currently. but we would need to double this volume in order to reach that level of maturity. All of the Exchanges in the world are regional exchanges except London and New York. industry participants and financial officers and exchanges. Exchanges in the world are essential to communities. It is a closely knit community with a very open relationship with people more based on trust and confidence. Derivatives markets tend to develop over a number of years.What would you say is the single most important direction for the Montreal Exchange over the next five years that you would like to see develop? Canadian Dollar Chaos I would like to see the Futures achieve a much higher level of volume to the extent that it could become a far more mature market.

it requires larger levels of capital and liquidity that the regional Exchanges may not necessarily be able to meet. As a company grows into an even larger entity. because they are all reflections of this human activity at work.G7 Books larger pools of international capital in New York and in London. This is why we have so many exchanges in the world. With technology advancing the way that it is. will there not be one global Exchange in the not too distant future? There is a global market. What we may see. is a network of inter-activity between all of the Exchanges. we try to regain an important part of their trading activity. as tendencies to protectionism and impediments in a regulatory sense will be overcome. Finance is a human activity and involves interrelationships among people. which frustrates me. we don’t view it as a loss. What do you not like about the development of world stock Exchanges? It is going a little too slowly. and you have to make a distinction between the market as such and marketplaces. Over the years this global market will be better organised. When one of our companies achieves such a status. however. 20 . but instead.

over 40 percent of this national debt is held by foreign investors. Due to NAFTA. Mexican interest rates went to 40 percent. such that problems in Mexico now draw attention to Canadian problems. 21 . In 1994 the Mexican inflation rate of seven percent was well above US and Canadian rates as were increases in its unit labor costs. or Cdn. $3040 billion a year for the last decade and provincial deficits. Mexico’s interest rates were as high as 18 percent after its April 1994 devaluation of 8. after NAFTA. Canada’s inflation rates are low. The parallels between Mexico and Canada are disturbing. Canada’s total federal and provincial debt is Cdn. worse even than Italy whose debt is mostly held by domestic investors.the wrong series of events could make the Canadian dollar a northern peso. but these will take several years to turn around its trade deficit. It fell below 70 cents US for a time and has depreciated over 20 percent against the US dollar since 1991. In terms of economics.5 percent.000 per capita. the Mexican current account deficit was spurred by a surge in consumer imports not compensated by increased exports. Also. both have economics-based debt problems and politically-based separatist regimes. In Canada. Canada and Mexico are now linked in the international currency markets.especially given the volatile situation in Québec . but her interest rates are being pushed up by rising US interest rates. One new and unexpected development of the peso devaluation was a run on the Canadian dollar. After the Christmas 1994 currency crisis. Rugman A Vote For Separation In Quebec Will Create Another Peso Effect The Mexican currency crisis of December 1994 devalued the peso by some 40 percent until promises of loan guarantees from the United States of $40 billion stabilized the peso-dollar exchange rate. the federal debt has been increasing at the rate of Cdn. For the first time the Canadian dollar was sideswiped by a Latin American currency crisis. $780 billion.THE NORTHERN PESO Alan M. especially in Mexican manufacturing. International investors have shown a preference for the US dollar against either the peso or Canadian dollar in times of a currency crisis.$27. Thanks to the North American Free Trade Agreement (NAFTA). especially in Ontario (under a socialist government for over four years) and Québec (now under a socialist and separatist government) add to the total debt. major readjustments are underway. Since there is a significant amount of political risk in Canada .

Yet all of these linkages. In Canada. While there is unlikely to be armed conflict if Québec leaves Canada. there is no realistic equilibrium value of the currency. the new governing party in the province of Québec. this underlying political risk fuelled negative investor perceptions of the peso in the Christmas 1994 currency crisis. and Québec reneging on its share of the national debt. in the face of a determined attempt by the government of the province of Québec to make a de facto unilateral declaration of independence. With a complete loss of investor confidence due to Canada’s failure to reduce its deficits. As 22 . has attempted to smooth the painful transition process by statements minimizing the economic costs of Québec separation. and will only remit its share of interest payments on the debt if its separatist agenda is agreed to by the federal government. It is difficult to predict how far the Canadian dollar would fall. The foreign exchange reserves of the Bank of Canada and existing credit lines would be lost in a few days in a major currency crisis. Québec separation. there is every reason to believe that the international money markets will engage in a massive sell-off of Canadian dollar denominated assets. will have to be renegotiated. the timing of the vote. Obviously this means trouble. in contrast to his assumptions. in Mexico the January 1994 rebellion of the Zapatista National Liberation Army in the Chiapas region was allegedly tied to anti-NAFTA sentiment.G7 Books In terms of political risk. and reject ownership of its share of Canada’s huge national debt. giving currency risk to the Canadian dollar. are all politically unstable events which could trigger a currency crisis in Canada. This would lead to a major currency crisis with substantial devaluations of the Canadian dollar. Jacques Parizeau. Indeed. The entire process of separation will create a period of acrimony and political uncertainty. A year later. but that Québec will not take responsibility for its quarter of Canada’s national debt. It could become a northern peso. will likely hold a referendum in summer 1995 to vote on the creation of a sovereign state in Québec. and if it is legal and/or feasible. there will be an extremely difficult and tense transition period during which the Canadian dollar is at risk. The anticipated vote. debates about how separation could occur. The PQ has said that it will use the Canadian dollar as its unit of account after separation. The current premier of Québec. He asserts that Québec will remain a member of NAFTA. and its separation from Canada. (In purchasing power parity terms currently it should be closer to eighty than seventy cents against the US dollar). the GATT/WTO and NATO. the Parti Québecois. after the assassinations of two major political leaders and the kidnapping of business executives.

if Canada can only resolve the Québec issue (and stabilize its deficit) then a northern peso may be avoided. Canadians are. As Mexican manufacturing recovers and the strong resource-based fundamentals and high productivity of Canada reduce the short-run political risk. only quick intervention by the US government and US Federal Reserve would work. Under NAFTA. Hopefully. The external US pressures to influence Canada’s internal policies would worsen the political situation in Canada. in general. the US loan guarantees and other financial support from the IMF would help to stabilize the Canadian dollar. However. then a northern peso may. and imports decrease. So. there should be renewed foreign direct investment into both Mexico and Canada and more political stability in their regimes. reluctant to lose sovereignty and a bail out by the United States would undoubtedly be accompanied by US pressure to reduce the deficit. for example. The bright spot is that it is also possible that NAFTA could act as a stabilizing. Hopefully. and presumably even more important than Mexico in NAFTA. force. However. If both the peso and Canadian dollar are substantially devalued then both Mexican and Canadian exports to the United States should increase. Alan M. then both the peso and Canadian dollar should strengthen against the US dollar. if these two events do not come to pass. Québec will not vote to separate. Cross-listed Mexican and Canadian stocks (on the US stock markets) would again become attractive with a high volume of trades. where strong anti-American sentiment would be coupled with Québec separatism to increase political instability in Canada. by cutting Canada’s social programs and related government expenditures.International Monetary Fund (IMF) credits are too small and slow to mobilize. rather than destabilizing. Canada’s huge fiscal deficit will be reduced. Rugman is Thames Water Professor of International Business at Oxford University. 23 . Canadian Dollar Chaos Since Canada is the largest trading partner of the United States.

The analysis about the good progress Do you have a particular value in mind? The Wall Street Journal labeled Canada as an honourary member of the Third World. I don’t think the Canadian dollar would depreciate much below the 70 cents US to one Canadian dollar. in the second scenario where Québec separates. there would be a dramatic devaluation in the Canadian dollar. Anything below that would send a strong signal to the international financial community. I believe that international financial markets will be happy with the current budget tabled in Canada.TWO CRISES: THE PESO AND THE “NORTHERN PESO” Interview with: Directed by: Alan M.Z. and the series of follow-up measures which are expected to reduce the annual shortfall. The problem is that Canadian debt is foreign-owned. can you also say something about a particular danger point for the Canadian debt and deficit ratios? If we analyze the debt problem in more detail. If the Canadian dollar would just keep falling. Vukson Canada Joins Soft Currency Club The analysis in the Wall Street Journal is correct. The second problem for Canada is an internal political issue. Khouri and William B. Canada has more debt per head than any other country except Italy. that the Canadian federal government is not serious about reducing expenditures. so there is a tremendous amount of instability.Canada has a huge fiscal deficit and no government at the federal level has really been able to address the debt problem. It wouldn’t surprise me at all if Québec voted to separate. currently forecast to be $35 to $40 billion dollars. In terms of the budget deficit. There is a real probability that Québec may vote in 1995 to leave Canada. I also agree with the Wall Street Journal editorial.” Now that we have a currency range. In that case. However. and really no control over the value of the Canadian currency that is held by the international financial community. If that were to happen. and financial markets are already discounting this political risk in Canada. it could end up at seven cents US. reliance on external financing. I would call it a “Canadian peso. The first reason . Can you comment? 24 . The value of the Canadian dollar is low for two main reasons. I really see no floor to the Canadian dollar. Rugman Jerry J.

The Canadian dollar is in a very vulnerable position now. Italy and Sweden can be implemented without recourse to severe austerity measures imposed by institutions such as the IMF. That would then signal that the Canadian government would be forced to implement austerity measures whether they like it or not. the easy way out for Canada and other soft currency countries would be to organise into a “soft-currency” club. The Canadian dollar has always been a boring. not only reduced the growth in its debt. The province of Alberta in particular. I do not believe that Canada has enough foreign exchange reserves at this very moment. and now this scrutiny has cast that up to the searchlights. After the IMF is called on. I don’t think Canada can arrange credits with other major countries in order to save the Canadian dollar. but it is also together with very weak Latin American currencies. How do you view such a scenario? Canadian Dollar Chaos It has several points of merit. and uninteresting currency which nobody paid much attention to. so we have a situation of uncertainty against the peso and the Canadian dollar within the North American context. We now see in December 1994 and January 1995 a new phenomenon.made by some of the provinces should be of note. The Canadian dollar started falling immediately after the peso was devalued. but by reducing the current increase in the deficit. while avoiding any serious measures towards austerity? We need to be concerned about the Canadian dollar for the first time in our history. the devaluation of the Mexican peso and the costly price of the peso which ended up in spilling over to the Canadian dollar. is now trying to reduce the stock of debt. what would be its first practical order of business in Canada? 25 . What this means is that the attention of foreign exchange traders is now being focused on Canada. In addition. the Canadian dollar would just keep falling and the IMF would be called in. with Europe’s weak currencies like Sweden and Italy. measures which they have been delaying for some 15 to 20 years now since the first Trudeau government. This effectively links Canada to latin American currencies. At this point in time. but I am certain that we will get a currency crisis if Québec separates. There is a currency crisis. so that a solution to the debt crisis within countries like Canada. I agree with you that Canada has joined a group of soft currencies and Canada has the additional problem that the dollar can also be hit because it is a member of the North American Free Trade Agreement (Nafta). in a classic currency crisis. What if the soft-currency bloc does not pay attention to the actions of foreign investors and currency traders and continues to accumulate deficits. We could be subjected to a currency crisis from the analysis of the debt. Therefore.

are more long term in nature.G7 Books I think it would follow the traditional route. Ten provinces with different governments. The measures which then follow. I mean you blame somebody else for something you should have been doing all along. and so on. liberal and conservative. To go back to the hypothetical intervention or possible incursion into Canada. and a federal/provincial conference on the economy would need to follow shortly afterwards. as a friend. socialist. it’s almost an insoluble problem. in the Canadian case. What I mean is that the IMF is basically there as an ally. The Canadian situation would be just a continuation of that pattern. So. inflation is accelerating. you would need to have IMF intervention both at federal and provincial levels of government. the British used to blame the gnomes of Zurich. provincial expenditures would also have to be reviewed. The good news is that the IMF can assist in getting a more sensible economic policy. I agree with you. Now Canadians would be able to blame the New York financial market. However. But it’s the same. but it is also a broker for the international financial community. That would be quite tricky. Canadian politicians may favour such a scenario. At the moment. The arrival of the IMF is the bad news. 26 . There’s good news and bad news when the IMF comes. your currency is becoming worthless. I agree this is a major problem. since it is much easier and simpler to place blame on unpopular measures of austerity with the ensuing social program cutbacks on an abstract and ambiguous external organisation such as the IMF? I agree. it means you’ve failed. or as a linkage to the international financial community. since the provincial budgets are some of the ones that are far more unbalanced ? First of all. Basically. The provincial debt in many cases is outpacing the growth of the federal debt. I recall that in the case of the British devaluations. Indeed. Most countries are members of the IMF. interest rates are high. so it requires that domestic expenditures be reduced and government expenditures on social services in Canada be cut. and have been successful in many countries such as Great Britain in the 1970s and more recently New Zealand. It means you’re giving up control over economic policies and it means that you should be. In the case of Canada. I would not call it intervention. the federal government would initially act to request help. so it in a way mobilizes resources and outside help. an austerity program can be pushed through easier by the Canadian governments if the IMF insists on it. in terms of more credits and outside support for the Canadian dollar. A package of internal measures would then be accompanied by some external co-operation which the IMF could bring. would have to be disciplined. What the IMF does is a basic macro analysis. I think that the mere request for IMF intervention and its eventual arrival would be enough to bring a halt to a currency crisis.

While the debts and deficits are important to reduce. there are also the social and political problems that will persist in Canada. where it’s probably one of the most confused countries in the world in terms of its constitutional arrangements. almost tribal interests in the sense of accommodating Québec and bribing Québec to stay within Canada over the last 40 years. The exchange rate is depreciating. which represents the correct measure of Canada’s lack of competitiveness. because they bungled the devaluation terribly. I think the Mexicans made it worse for themselves. We have financial markets judging Canada on its performance. racial interests. giving immense powers to the provinces. Why are they working at cross purposes? Canadian Dollar Chaos Mexican Peso Crisis I think the Mexican peso crisis of December. on its competitiveness. They did it just before Christmas. and perhaps just after Nafta was ratified would have been an opportune time. So Canada is driven politically by equity considerations and we all know from basic economics that equity distribution considerations are incompatible with ones of efficiency. which required a devaluation in December. 1994 and January. There should have been a devaluation of the Mexican peso probably in 1993 rather than 1994.I think it is the basic economic problem of efficiency versus equity. One economic strategy was geared up towards providing confidence in the value of the peso and encouraging foreign investment. and then they all went on vacation. when the trades on international money markets are very thin. The Salinas government was committed to not devaluing its currency. It was appalling that the week between Christmas and January 1. It was largely successful. especially in context with the North-South relationship? Having said that. 1995. Why is Canada not competitive? Why is there a budget deficit? The answer is that Canada’s political system is geared up to serve special interests. there was no information coming from any Mexican authorities. and that performance is not good. on its efficiency. What are the short and long term lessons from the Mexican crisis. Don’t you think that both sides of the divide on the debt. but the trouble was that the new Mexican administration inherited a suppressed economic problem. What had existed was the total absence of policy and nobody to reassure the international financial community. the peso crisis was partly the fault of the new government. Until Canada can solve its political problems. and so the 40 percent depreciation in the peso turned out to be double what should have 27 . the future for the Canadian dollar doesn’t look very good. 1995 was unfortunate. while the money markets had about a week to ten days without any solid policy pronouncements with regards to the ensuing developments. on its productivity. the social policy leaders and economists have legitimate concerns.

Firstly. Salinas is partly to blame. it has low productivity. The problem is with the Mexican government. since the US will not tolerate a weaker peso. Secondly. and lastly. and handing over a devalued currency to their successor. have your people on side to talk to the New York bankers about the shift in domestic economic policy framework. plan it properly. one would expect Mexico to be having difficulty. Its manufacturing sector is tremendously inefficient. and it turned into a classic currency crisis. don’t go on vacation the week after you devalue. You blame the Mexican government. Nafta also gives Mexico access to the world’s richest market. it needed a small currency devaluation to help it along. Salinas should have done that. Now that Mexico is part of the Nafta treaty its adjustment process will be even more intense. Would the peso crisis have been a lesser crisis had Nafta not been in place? Nafta sends mixed signals around the investment and economic communities internationally. but should blame not also be apportioned to Washington and Ottawa for over-promoting Mexico as a location for investment? A somewhat provocative question! I have a definite answer. I think that Mexico has a higher profile for international analysts being a part of Nafta. but certainly no one in the United States or Canada. it’s a negotiated access and what Nafta did for Mexico is to give it an opportunity to become more efficient. but it’s not perfect access. in the process of privatization. consequently. which has a current account deficit that has been steadily deteriorating. The Mexican peso devaluation has nothing whatsoever to do with policy in Washington or Ottawa. Do you have any views on the politics of Nafta? I agree with you. and has to be completely restructured. Of the three countries in Nafta. Americans are notoriously xenophobic. since there is only a limited amount of time under which a devaluation will be tolerated in the US Congress. Meaning that domestic Mexican industry will need to become even more productive in order to successfully compete in the US market. The Mexican government could have solved it by a timely devaluation. it is in the process of restructuring. Only 15 percent of 28 . if you are going to have a devaluation. The lessons from the crisis in Mexico are threefold. especially in its manufacturing sector. There is a history of Mexican presidents doing the dirty work in their last few months in office.G7 Books been the case. the United States. Mexico is the one with the biggest adjustment problem. Presently. There is absolutely nothing that the United States or Canada could have done or could do in this case. so a year into Nafta. and especially to analysts resident in the United States.

Apec is just a talking club and they have agreed to talk to the year 2020. but also by a lot of speculation in the stock market to the extent that in 1994. Apec may start to do what Nafta does. Since Congress approved Mexico’s entry into Nafta. Which means 85 percent don’t care much about anything outside of the US. I don’t see 29 . It has been manifested in US investment in Mexico increasing. With the volume of trades increasing in Mexican stocks. since Mexico is more exposed. I believe that this entire process with Chile is a special case. lower tariffs and adopt national treatment. so it’s most likely the US Congress would not approve it.the United States. interest in the entire matter accelerated to the point where there is a lot of interest in Nafta now. and that Chile would then be subject to all of the dispute mechanisms and institutional framework in Nafta. at this moment. so I don’t think other Latin American countries are going to get into Nafta within the next five years.American citizens carry a passport. negotiations with Chile are not proceeding on the fast track. Apec will not turn into a regional trade agreement. Apec. the risks will reflect in currency depreciations. Canadian Dollar Chaos The debate on Mexico getting into Nafta. was big news in the United States. or even the European Union? Chile does not have many alternatives. Moreover. and it may be that this could be the first trade agreement designed to handle investment relationships. is not a formal trade agreement. for example. And if it doesn’t have a good story to tell. There is not a leading community in the US which understands international finance and economics. but I could be wrong. There will be a move towards having Chile adopt a national treatment for foreign investment. so a quarter of a century from now. I don’t see any constituency presently in the key country. How will the succession of countries such as Chile into Nafta potentially affect North America’s relations with the European Union? Personally I don’t see a great rush to let Chile into Nafta. the interests are so strong that there are neutralizing forces preventing Apec from moving much faster. Having been a participant in the Canada/US free trade agreement (FTA) negotiations and in Nafta. American investors have become more aware of what is going on in Mexico. In that sense. the countries would be forced to move faster. In fact. even to rush to approve negotiations with Chile. However. The key players in Apec are Japan. of the ten most traded stocks on the New York stock exchange. I can tell you that there will be discussions initially in harmonizing tariffs with the three countries in Nafta. two of them were Mexican stocks in the telecommunications and petro-chemicals sectors. Presently. But I don’t think this will be accomplished very quickly. China and the United States. How about countries such as Chile moving to become members of the Asia Pacific Economic Co-operation (Apec). It was one of Bill Clinton’s few successful policies.

supported a small devaluation by September 1994. Why are Japanese trade deficits barely an issue in the European Union? Is it the case. The end result is that the devaluation is greater than it should have been. Do you share their views? I don’t share this view. What I see is more suspicion of Mexico by American investors. If anything. The Mexican government basically did not have an economic package ready to satisfy the international financial community. because I think the US Congress is focused on one trade enemy at this point in time. and that enemy is Japan. as with the European steel industry. However. They are already afraid of having cheap American imports sucked into the United States. when Salinas was on the way out. The target is clearly Japan. coming in a disguised form. To remain with the peso crisis. can you tell us anything about the timing of the crisis? The currency crisis developed due to a herd instinct in the foreign exchange markets that reflected the underlying fundamentals. From a political perspective. but I don’t think it is in any way related to Nafta. 1994 the Mexican government devalued the peso by an amount which the market perceived as insufficient. In the interim. Do you think that the peso crisis will produce some kind of protectionist backlash which might see some kind of move to reverse Nafta? I don’t see any impact on Nafta. and they are more risk averse about Mexico. where European and Japanese manufacturers have come to a tacit understanding to stay away from each others’ respective markets? 30 . and that it should be around 15 to 20 percent. not Mexico. The underlying fundamentals in terms of the purchasing power parity conditions for the peso against the US dollar as long ago as 1993. In the long run. Chile is interesting in the sense that its trade is diversified between Asia and Europe. I expect that there will be more protectionism. since as much of its trade is going there as it is with the United States. Nafta will encourage a higher rate of American investment in Mexico and the stock of foreign direct investment will increase. It was clear that there should be a devaluation.G7 Books Chile having any second choice in an organisation such as Apec. Nafta serves to isolate Mexico and Canada from the worst excesses of US protectionism in Congress. the finance minister failed to reassure the investment community and subsequently had to resign. I believe that American investors have wised up. not Mexico. so it may very well turn out that a better alternative for Chile would be to seek a closer association with the European union. Around December 20. after which a fullblown currency crisis started. Congress would probably evaluate any kind of peso devaluation as something that would be very detrimental to American industry.

Americans are extremely inward looking. Why do we see the yen appreciating vis à vis the German mark and the US dollar continuously? Is it solely based on the trade deficit issue. Furthermore. the Japanese have maintained their ability to make foreign direct investment. and in the recession in Japan. it is also the most liquid economy in the world. Trade between Japan and the European Union is trivial in comparison to the intra EU block trade. The US and Japan were at war. and that is because there is less of a trade deficit between them. Despite the bursting of the speculative bubble in Japan and the world-wide recession leading to the fall in the Japanese stock market. the world’s fastest growing and overall leader in trade and investment is Japan. there is a deficit in foreign direct investment stock between the US and Japan and there is a cultural problem. They are used to dealing with other countries within the EU. some interesting things have developed. If I were to ask the basic international business question to both a European and an American: What is the language of business? I am sure that the American would respond by saying English. This is where the action is. there is much less trade and investment between Japan and Europe. In short. with huge rates of growth when compared to North America and Europe. 31 . Basically. How do you account for the strong value in the yen these days. Asia is the fastest growing area. so the Japanese yen reflects this hegemony. It is quite clear in retrospect. I think both. that within the triad of the world’s wealthiest countries. and to do that they are used to having a more international mind set than the Americans. One amazing fact is how few American firms or European firms are competing with the Japanese. I think there is an underlying economic reason for USJapanese tension. so Japan continues to be the world’s economic engine. Japan is leading world trade and investment which is why the yen is so strong. you have to be in Asia. Europeans are much more culturally secure. You have to do an analysis of Japan. they have turned their attention toward south east Asia and China. There is this huge and persistent US trade deficit for the last ten years at some $40 billion dollars a year. To be a player internationally. or is it a cultural misunderstanding between Japan and the US as opposed to Europe and Japan? Canadian Dollar Chaos Having said that. but the European would give the correct answer: the language of your customer.There is a very simple reason why there is less tension between Europe and Japan. America helped Japanese restructuring and the Japanese are now beating the Americans in the economics and finance game. so less tension exists. I just don’t see that tension existing between Europe and Japan. as there is between Japan and the United States.

Bombardier. This futile action was a clear signal to most business people that the Bank of Canada is hopelessly out of step when considering the prevailing orthodoxy of central banking among most industrialised countries.) in the area of high tech development.634.70 cents. which were designed to initiate Canadian firms to the benefits of foreign markets in the 32 . Magna International. etc. Despite all of the good news. into one that encouraged the development of a high tech and telecommunications sector. Unfortunately. while severing its historic financial link to its main trading partner. The “team Canada” trade missions were regular trips to high growth areas such as east Asia. since the dollar tracked the general fall-out in global commodity prices. the surprising collapse in the currency leaves a puzzling thought to many. For the first time since the 1960s.TRAPPED IN ASIA! William BZ Vukson Canadian Dollar & Canadian Companies Canadian politicians are quick to point out that all of Canada’s economic fundamentals are in good shape. Malaysia and Thailand. the federal budget is in balance and inflation has virtually disappeared from the economic landscape. Despite the grand efforts of the Liberal Chrétien government to change the nature of the economy. it seemed as though it carried the Canadian dollar with it. the cold reality is that 40 percent of all exports are still very much resource-based.65 to US$0. How could it be that the Canadian dollar is not keeping pace with the rest of the economy? While the dollar has slowly sunk into its new trading range between US$0. as the Bank of Canada under the direction of Governor Gordon Thiessen. it continued to disappoint by reaching an all-time low of US$0. Although Canada has several globally competent firms (Northern Telecom. The surprising aspect of the decline is that Canada became more linked to events in Asia. What may be even more disturbing is the push that reluctant Canadian companies have been given by an aggressive federal government in opening up trade in countries like Indonesia. the fortunes of Canadian economic development were set back decades. As the yen fell on world markets. they are still too few in number to have any lasting effect in changing the overall nature and perceptions of investors of it being a predominantly resource-based player in world markets. reacted in a fit of desperation by raising the short term bank rate by one percent in order to protect against any further declines that may come. The desperate attempt to raise rates only did more harm to the dollar over the medium and longer term. whose declines were accelerated by the deflationary effects that were beginning to build within the east Asian trading zone.the US.

hopes that it would expand overall sales and in the process improve balance sheets. With east Asia in crisis. diversifying away from the limited domestic marketplace. the question now is whether these innovative participants will ever be paid for the work that was performed or for the goods and services that were sent to this region? Canadian Dollar Chaos 33 .

were lowered to historically-low levels.S. What is the reason for such a large fail. with the spread remaining well above the 250-300 basis point range. real estate in southern Ontario. and natural resources. Furthermore.First Quarter: March 21. Damaging foreign investors' confidence in the domestic economy. economic conditions have adversely affected Canada.88 cents to one U. coupled with a high dollar supported by the zero inflation goal of the increasingly independent Central Bank. when the fundamentals indicate the reverse ? This has much to do with the present constitutional crisis with the Province of Quebec Moreover.S. recent massive borrowings in the Eurobond markets for the Province of Ontario and Ontario Hydro. The Canadian dollar. with recent record loss figures being recorded by the big three North American firms: General Motors. the dollar has continued to fall from a level of 0. however. has worked against any hopes of a robust recovery in the near term. The repercussions in the industrial parts of Canada have affected all other sectors that normally rely on spinoffs from the car-making process.S. has put upward pressure on the Canadian dollar. all in Canadian funds. Real estate is one industry that especially supports most of the whitecollar employment in Canada. Ford and Chrysler. This.83 cents level as of March 19. 1992. has come under heavy pressure that resulted in intervention by the Central Bank This comes in light of the fact that short-term rates in the U. The tight U. The automobile industry has been in a world-wide free-fall over the past year and a half. Oil and Gas.S. and record layoffs being implemented in a vast restructuring program for General Motors. It has not been Impervious to the world-wide general slump. 34 . four of Canada's vital industries at the present moment are in a contractionary phase: automobiles. dollar to approximately the 0. 1992 Economic and Financial Review With over one-third of Canada's income generated by trading with the U. In spite of these three positive factors above. And the restructuring of the industrial-base in southern Ontario will affect this market for quite a while yet.

a project that has provided an important economic contribution to that entire region.S. The smart bet. The addition of possible large Russian dumping on world markets. as was the case in the Aluminum sector during the early part of 1992. If not. however. would be in favour of continued Bank of Canada support through a combination of massive intervention on the foreign exchange markets and increases in the central bank rate. Canadian Dollar Chaos 35 .81 cent levels. in light of the serious factors that are at work at the moment ? The difficult world price for oil. The most serious was the pull-out of Gulf Canada in the large Hibernia project off the coast of Newfoundland. recovery. Unlike the economic. World market conditions in the Oil and Gas industry have also severely dealt a blow to major exploration activity in the Canadian north and western provinces. recovery falters in any way.S. and if the U. which the Canadian authorities are hoping would revive an export-led recovery. and may even come as dose as the .80 to. Currency Outlook The real question is when will the Bank of Canada break. pulp. in combination with a moderate increase in the discount rate. the political situation with Quebec can be temporarily dealt with through a high degree of intervention on world currency markets by the Bank of Canada. paper and aluminum could greatly benefit by a devaluation of the currency Into the high seventy cent range relative to the U. dollar. will further add to the grief experienced up to now. in its unrelenting support of the currency. unless a setback occurs in the U.S. dollar.S. This would enable Canadian producers to obtain a slight important edge over competitors. The medium-term outlook for the dollar is a continuation at the present level. although that would add to the domestic pressure on the real estate sector and on automobile purchases. then severe pressure may prompt the Bank of Canada to work in the low end of the eighties relative to the U.The world-wide suppression of Aluminum and Pulp and Paper prices is just another example of how conditions in world markets are affecting the resource-based provinces. hence providing for a more stable environment domestically.

as problems persist on the real side of the economy coupled with Constitutional turmoil and a very weak recovery south of the border. As the market operations by the Fed as well as the Bank of Japan will not allow a further depredation of the Yen.Second Quarter: May 21. To re-iterate. and japanese currencies are overwhelmingly determined by external conditions. representing the sixth straight monthly decline.S. Furthermore. once participants are convinced that recovery Is firmly in place with upward pressure on prices. For that matter.S. as the recession deepened over the past two months with an increase in 57. the trading range with respect to the Japanese Yen will be influenced by the external trade Imbalance. in addition to the disappointing prospects of an export-led recovery from the U. the parities between the U. Monetary Policy is the only policy lever that has any room to manoeuvre at this juncture. the weakness in the domestic industrial and property sectors continue to exacerbate the grim employment picture. However. And. In particular. As mentioned above. As it seems that recovery will not be certain until at least that time or into the third quarter of the year. led recovery. and with the fiscal budgets strained both Federally and Provincially..S. there can no longer be any reliance on a U. the Bank of Canada may find that the outright abandonment of its pursuit of a hard dollar policy may be inevitable. 1992 Economic & Financial Review Nothing seems to be going right for Canada.5 and 1.6 vis-Avis the Deutsche Mark. From this moment. then this scenario will reverse.000 jobs lost in April/92. we re-iterate our views from the February/March issue that called for the trading range to settle eventually between 1.S. dollar. regardless of the deterioration in the domestic Japanese economy. To the Deutsche Mark. The economy showed signs of severe pressure. As a survey conducted by the Canadian Association for Business Economists attributes half of the current weakness to 36 .Aill be fought through an appreciation of the Yen to the 1Z5 to 130 range with respect to the U. The increasing surpluses registered recently. the persistently high rates on Mark denominated securities coupled with the decreasing rate on dollar instruments will add further downward pressure on the dollar over the remainder of the second quarter.

wholesale and retail trade. insufficient investment and barriers to competition. high technology (telecommunications. a 19 year low.13 cents.S. Recently. interprovincial trade. Recently. Currency Outlook The continued low growth In the economy. or an average of $ 1100 in losses in annual income for each Canadian citizen. It is hoped that the Monetary policy option will attenuate the severe impact of the restructuring on the real end. poor labour relations. forest products. the Constitutional problems with Quebec's threat of secession affect the inflow of foreign investment to Canada. the Bank of Canada has reacted to the depressed real economy by reducing the prime lending rate to 7.S. pharmaceuticals). 83. They emphasize that a proper response to deal with these structural changes in the economy was not forthcoming by a large proportion of Canadian managers. in addition to the problems on the real side of the economy.severe structural change In the economy. and machine tools.5 percent. It was reported on May 11/92 that the dollar dropped one third of a percentage point to a 2 year low of U. tax burdens. computers. adding downward pressure to the dollar on foreign exchange markets. Among the sectors that according to the survey are experiencing this are: airlines. automotive. aerospace. Among the impediments to change that were cited in the survey were front and foremost management inertia. food processing and distribution. together with the restructuring that is presently taking form and the political influence on the markets should leave the Canadian dollar in the low end of the eighties with respect to the U. Canadian Dollar Chaos 37 . the Business Council on National Issues estimated that the Canadian economy would immediately contract by 2 percent if Quebec were to separate. The likelihood of it falling into the high seventy cent range is low at this point in time.

Third Quarter: July 24.84 cents to the U. the dissension within the ruling Conservative party itself was not a very encouraging sign.9 billion In May/92 from the previous month.4 percent decrease. Still a positive aspect to the economic profile had inflation recorded through the Consumer Price Index (CPI) down to a 30 year low.8 percent to Cdn. aluminum.66 percent as at July 15.4 percent In automotive product imports caused overall Imports to fall 3. the tragic announcement of the closure of the Newfoundland fishing industry for a two-year period due to stock depletion. In addition.S. 1992. and agricultural products remain on the low side. 1 percent. The currency held Its ground as it followed the Federal Reserve of the U. oil and gas. 1992 Economic & Financial Overview The Canadian dollar moved in a narrow range between 0. the weakness of the Import component confirmed that the economy was sluggish. In addition to the political problems are continuing signs of weakness In the resource base of the country. 38 . a fall of 3. $12. Of the comments that were made. further exacerbated the regional economic disparity in the country. r1rrdzIar over the past two month period. the preoccupation with the constitutional crisis and Quebec's insistence that the present negotiated agreement by the Provincial Premiers go further than what was agreed to in terms of acknowledging that It was a distinct sodety~ will also exert downward pressure over the Canadian Dollar In the long-term. In slashing the Bank of Canada rate down to a record low level at S.82 to 0. as new orders in manufacturing recorded an additional 2. Moreover. Federal Reserve.S. As world market prices In areas of pulp and paper.7 billion. In addition. as the June/92 rate attained 1.4 percent to Cdn. Since the weak U.S. As the merchandise trade surplus rose 0. $11. none were so poignant in the economic sense as were those of Trade Minister Michael Wilson who commented on the failure to address the weakness of the economic union of the country: "It doesn't lead to a stronger Canadian economy". This was a further indication of economic weakness that the Bank of Canada was able to exploit by reducing rates in stride with the reductions coming from the U. recovery was unreliable in pulling Canada convincingly out of this recession. Clearly.S. it was still the export performance that was at the centre of any domestic revival.

the Dollar should in all likelihood retain its present level of support. is difficult to speculate on. however. and serious political problems which in the upcoming months may only accelerate. 39 . The Dollar remains remarkably stable as the enduring effects of the credibility attained by the Bank of Canada as an advocate of price stability still exert the predominant sentiments in the markets.S. barring any severity of such a sort over the next quarter. it is doubtful If the Bank of Canada could maintain the Canadian Dollar at its present level vis-A-vis the U.S. If constitutional problems accelerate to unbearable levels.Currency Outlook Canadian Dollar Chaos In light of the continued sectoral weakness of the Canadian economy. in the low end of the eighty cent range relative to the U. However. the severity of which. currency. This is one factor. without foreign assistance.

On the flip-side corporate profits rose by 5. As the real economy continues to register disappointing results. the U.S. This was captured by the decline in total paid hours by 0. The 14 basis point fall to 4. as the overvalued Dollar.response from American exporters.S. 1992 Economic & Financial Overview While politicians focused their attention on the Constitutional negotiations.6 percent for the month of August/92. fiscal policy is unable to provide any useful stimulus due to the deficit hangover. off by 0. or Mexico have recently been negotiated.000 jobs in August/92. the unemployment rate came in unchanged at 11. Furthermore.S.6 percent in the second quarter.4 percent in the second quarter and a complete absence in inflationary pressures.P. Due to aggressive monetary easing& the Bank rate fell on September 3. Consequently. under the present environment. And. the Bank of Canada was left to mind the faltering Canadian economy.1 percent in the second quarter and continued to show a promising positive trend.S economy on the verge of another marked decline. even more so In this environment. The question remains as to whether this development should cause a 40 . would elicit an equivalent .5 percent in anticipation of the outcome of Thursday's T-bill auction. With the U. market are thinking twice about diversification. 1992 to its lowest level since 1973. markets.25 percent from 6. the prospect for further monetary easing becomes ever more real. the restructuring of the Canadian economy was very much a topic of conversation. it remains that Canadian exporters cannot any longer patiently await for a resurgence in the confidence of the American consumer.S.N. total manufacturing employment was down through the elimination of 27. With automobile sales from the big three North American manufacturers falling by 7.P. coupled by an anaemic recovery prompted several companies to respond through the process of labour-shedding.S. the anticipated export boom from the U. as a triple-dip scenario became the primary focus. Irregardless of whether or not closer trading links with the U. In fact.93 percent prompted the large chartered banks to lower their prime lending rates to 6. Any additional push into the U. administration was more interested in aggressively encouragIng their own exports to revive G.6 percent in August/92 over a one year period. which represented the third consecutive decrease.Fourth Quarter: September 11. traditional Canadian exporters into the U. economy did not materialize. With G.N.

as Canadian Provincial debt has always been In favour. we assume that the referendum produces one united Canada. range on average over the past year. along with enjoying a relatively independent direction in monetary policy from the political authorities in Ottawa. Is an additional attraction to foreign investors. a positive Canadian Dollar Chaos 41 . Federal Reserve short-term rates. the factors that will have some effect on currency markets are the constitutional vote.S.S. Overall.83 cents. Currency Outlook Over the past several months.S. If the vote does not go as planned. has more or less fluctuated around 0. The wild-card in the currency markets will be the reaction of participants to the nation-wide referendum on the Constitution to be held on October 26. As outlined In the economic and political commentary above. Of which the Constitutional vote will overshadow the other factors considered over the immediate term.S.80 cent range will ensue. 1992. as a stronger Dollar will be detrimental to a badly needed push on the export side. Assuming that the referendum registers an affirmative vote. then the positive sentiment flowing to the Dollar markets will ensure that the higher dollar will continue to affect long-term labour shedding. the Westerners with equal representation in the Senate. a serious fall in the Dollar to the.S.fall in the Dollar relative to the U. Dollar. and the spread over the U. Eurobond Investors have bought C $24 billion this year alone. This factor is an additional element that has supported the Canadian Dollar at the present 0. as the spread offered over comparably risky Treasury bills in the U.S. and Canadian rates has always been on the minds of international investors. The agreement has gone a long way in satisfying each regional element in Canada. Sadly. as the Bank of Canada further eases rates? Or will the Bank rate eventually come closer to the short-term Federal Reserve discount rate? The question of spreads between the U. And the Bank of Canada may not respond in kind with an adjustment in short-term rates for the fear of creating a greater economic crisis. the continued long-term restructuring of Canadian industry and the long-term effects of high unemployment. the agreement does not go very far with regards to the concept of free-trade between the Provinces. Being optimists. though. The Bank of Canada with its precommitment to a zero rate of inflation.83 cent to the U. and the Natives and Quebecers being recognized as having distinct societies. the Dollar vis-A-vis the U. has always been favoured for the higher yields offered on the Canadian issues. 70-. Under this scenario we can foresee positive side-effects strengthening the Dollar and allowing the Bank of Canada to ease further.

G7 Books vote.S. we expect that the Dollar will settle at an average range of 0. Under this scenario.86 to the U. should be beneficial In stimulating the domestic economy. as expected.84-0. that has for a very long time been sorely missed. as lower rates from the fall-out and the positive climate for investors should be a welcome element. currency. 42 .

0%.2s to 8. very briefly caused the Dollar to rise by 0. 1992 after the negative outcome of the referendum.5 of a cent against the U.First Quarter: December 15. The Bank of Canada has had to use a wildly fluctuating prime rate in order to target the desired external value of the Dollar in the run up to the referendum on a Federal political agreement. and orchestrated to preserve the credibility that it had achieved over the past five years. Dollar.s.80 U. lingering over-supply in world commodity products has depressed prices and directly affected the profItability of Canadian exporters. but which will contract 43 .2S% on October 1. in anticipation of political uncertain on September 30. 1992 at 9. With the present prime lending rate as of December 3. which had presided over three years of sub-par economic performance.S. The rate of Interest was raised Initially to 8.1992 • Bank of Canada raises prime lending rate from 6.s. as well as once the after-shock had occurred. In addition. 1992 and then lowered to 7.25% on October 1. The reaction of the Bank of Canada was swift. and the Dollar averaging . The prevailing consensus is that the vote was a reflection of the frustration felt toward the ruling Conservative government.75% on October 28. 1992 in support of the dollar • World commodity prices continue to be depressed • dollar falls below 79 u.60 u. to end recession A combination of political uncertainty and deterioration in economic fundamentals have caused the Dollar to fall below .S. as the focus turned to protect the external value of the Canadian Dollar in its goal to preserve the 1% rate of inflation that It had achieved. With the only remedy being the continued fall In the value of the Dollar. 1992 • Referendum rejects new Constitutional accord • dollar falls below 79. there remains an 8% real rate that will positively affect the inflow of international portfolio investment. In very untypical fashion the Canadian public had rejected the compromise agreement known as the "Charlottetown Accord"..s.78 U.S. for first time in 5 years • fiscal position dramatically deteriorates • faith is placed on recovery in u.

The unexpected drop in tax revenues of $18 billion have prompted Finance Minister Don Mazankowski on December 2. recovery coupled with the commitment of the Bank of Canada In preserving the value of the currency In order to keep Inflation low will all be posItively reflected on the value of the Dollar.S. recovery in order to gain the positive export stimulus dividend. the positive factors from any demand-pull out of the U.S. the value of the Dollar should fall within the 75-80 cent range to the U.G7 Books productive Investment spending.S. to 78. With a seriously high unemployment rate and high excess Industrial capacity. Compounded by the fact that both this years' and next years' deficits will severely overshoot initial forecasts. action to address the deteriorating fiscal position and the impending U. With the domestic economy depressed through high rates.S. As a capital project is discounted at higher interest rate levels. This is one of the present difficulties that the Canadian economy is experiencing from the policy to preserve the external value of the Dollar.S. In addition.S. On the other hand. It seems that this positive sentiment will be maintained until a general election is called during the course of 1993. it becomes less profitable until It Is delayed altogether. pickup and some pickup in the world economy that we've got some brighter days ahead" Currency Outlook The negative factors as mentioned above include lingering doubts about the political Identity of Canada. the Dollar immediately rose in European trading from 77. 1992 to propose spending reductions of $8 billion over the next two years without raising taxes. Consequently. over the medium-term. the medium term fiscal program to limit the deficit will be a good complement to the efforts of the Bank of Canada to maintain a strong value of the Dollar. the ruling party has placed faith in a quick U. depressed commodity prices and the effect of high interest rates on the domestic economy. As the Finance Minister openly stated: "We believe with the U. As a result of this action. 44 .08 U. will be a long-term effect.S. Dollar. the high Interest rate policy of the Bank of Canada is hoping to counter-balance these negative effects on the currency. In addition. depressed world commodity markets and continuing political turmoil. On the other hand.73 U. the depressed state of world commodity markets require a similar cheap Dollar polIcy in order to pull the country out of recession.

The revenue shortfall becomes even more striking as Canada faces up to a situation which is unprecedented in the sense that a large portion of the debt Is in foreign control: 45 .Second Quarter: March 19.p. highest in 2 years driven by exports • retail sales recover in april 1993 • Bank of Canada targets growth and external value of dollar Economic and Financial Overview Kim Campbell has not only become Canada's first woman PrimeMinister.d. This Is not surprising as the structural recession has seen approximately 200. but Is also the choice of the Progressive Conservative party to lead it Into the upcoming election that is expected to be called in the fall of 1993.dp.8 percent recorded in flrst quarter of 1993 • g. Although not much is known at this time concerning the political skills of the new leader and how they may ultimately set the policy agenda in the upcoming election. increase of 3. While the Bank of Canada works to defend the external value of the dollar. While most of the economically significant Provinces have been reluctant recipients of recent debt downgrades. 1993 • Kim Campbell chosen as new Prime-Minister • general election expected to be called in the fall of 1993 • structural recession causes large Provincial deficits • excessive Provincial debt causes downgrades from rating agencies • foreign investment reaches record levels in recent months • central bank rate lowest in history • g.000 manufacturing jobs disappear in Ontario alone. politicians both on the Federal and Provincial stage are showing early signs of responding to the debt dilemma. early indications point to across-the-board restraint. Provincial politicians have had to Invest extra time In order to make politically unpopular decisions on cutting back expenditures.

relations in the world today will tend to be most unkind to the smaller players In the world economy such as Canada.552 1988 20. will continue to erode employee social benefits and will Increasingly cause friction as jobs that are non-essential to the bottom-line will continue to be reduced.094 1992 42. costs and wages will even more so become governed by the country that is the most productive and cost efficient. political parties which desire progress and attempt to re-sell the stability creating policies that were so successful In the past run the risk of outright rejection of the electorate. as the world becomes more price competitive.253 1982 16.601 Source: Bank of Canada Review As the table Indicates. Moreover. Canada. as falling tariffs and technological advances encourage shifting of production facilities out of the advanced industrial countries. Although being a very large country with abundance In natural resources. In such circumstances.G7 Books CANADIAN LIABILITIES TO NON-RESIDENTS 1981 13. In addition. One may interpret this unprecedented recession and the actions that go with it as a symptom of the Increasingly global market for finance.313 1987 17. As the challenge that faces all 46 . this Is a major reason that explains the program of cutbacks that the country's largest Province.Ontario is now uncharacterIstically forced to make In light of the fact that It Is governed by the socially-oriented New Democratic Party. the fact remains that Canada's domestic market Is very small due to its low population.890 1983 9. For that matter. This. With the proliferation of new Impressive advances in Information technology and the ending of the cold war.643 1989 22.912 1991 45. The volatility that this brings to the external value of the Canadian dollar forces the Bank of Canada to pay much more attention to interest rate adjustments as opposed to previous years. it must increasingly rely on exports in new markets in order to replace lost jobs to the continuing outflow of old manufacturIng industries towards underdeveloped countries. The Inertia that is shaping economic and political. not unlike many other advanced western countries such as In Scandinavia Is finding It very difficult to adjust to the new realities.232 1990 24.450 1984 9. as we have already witnessed. there has been a virtual doubling of Canadian debt that Is now held by foreigners.284 1985 14.399 1986 25.

80 cent level. the austerIty measures adopted In the major Provinces concerning debt management will also affect confidence in the dollar. would not exceed the .79 to the U. and also any attempt by any of the political parties to propose policies that were successful in the past during the run-up to the elections could over the following months yield continuous excitement in the dollar markets.S.of the candidates come this fall is how to effectively govern in a period that Is actively ungovernable. Any attempts otherwise will cause wild fluctuations in the dollar.S. dollar during the run-up to election day. Currency Outlook The Bank of Canada's stabilizing effect on the dollar may only play a supporting role over the next several months during the run-up to the election campaign.74 to . we can anticipate a trading range of . Canadian Dollar Chaos 47 . given the uncertainty that Is ingrained at this moment. it would be safe to conclude that the Canadian dollar vis-a-vis the U. However. Foreign exchange markets will keep an eye on politicians proposing a return to the prosperous policies of the past. These factors. For that matter. are so difficult to judge. In addition. being political.

With unemployment frozen at historically high levels and with an election only days away. the rhetoric. The concerns that surround the unprecedented changes that have impacted this sector recently are not just relevant to Canada.S. but are an affliction in most industrialized countries today. 78 cents. Should a setback occur in the ratification of the North American Free Trade Agreement (Nafta). unfortunately. has fallen below its competitive value of around 0. 1993 • Election uncertainty and weak dollar weakens bond market • Dollar slips below real competitive rate relative to U.Third Quarter: July 16. the interest on the domestic state of manufacturing and industry has been elevated as one of the prime concerns. will focus on the wrong causes such as the recently negotiated free trade agreements. 1993 • New elections called on October 25. • Technological change causes low levels in capacity utilization • Construction permits issued continue to fall • Unemployment rate continues at high levels • Official discount as well as prime interest rates fall • Improvement in the balance of trade reflects weak domestic demand • Bank of Canada faces policy dilemma as recovery stagnates • Early signs that Provincial expenditures must be cut further Economic and Financial Overview Canada's real manufacturing side of the economy has hardly begun to show any convincing signs of growth despite the fact that the weak dollar vis-a-vis the U. or should the politicians mobilize to re-open the existing Free 48 . Although the upcoming election campaign will focus on the issue of joblessness.S. The rapid technological changes occurring in the way industry co-ordinates production along with the intensification of global competition both contribute to the present jobless environment.

the fall-out on the Canadian Dollar would be enormous.1 127.0 102. The pressure on politicians to act on the unemployment problem has resulted in great pressures for lower rates. manufacturing & utilities 49 .1 95.8 103. while making matters worse. since low rates are not making any impact on job creation while manufacturing continues to produce at a steady rate as is evidenced through the table below.3 97.2 107.8 111 97.Trade Agreement (FTA) which was concluded in 1988.6 82. It is a fact that technological changes have resulted in redundancies. Any rejection of this obvious fact by politicians will only serve to increase uncertainty and domestic regulatory burdens.4 111.5 11 102.7 IV 101.8 90.6 111 97. this problem has become politicized.8 106.7 95.2 1 Source: OECD Canadian Dollar Chaos Note: Industry includes: mining. as the trade agreements represent late reactions to what is already a reality.3 93. quarrying. oil.5 97.1 97.1 104. In essence. A very unfamiliar situation just half a decade ago.5 121. even though the new manufacturing age is not easily subjected to the familiar business-cycle cures of the past. especially now that an increasing proportion of foreigners hold Canadian Federal and Provincial debt. the Dollar must retain some stability. PRODUCTION: Indices of Real Domestic Product 1985=100 YEAR Industry Manufacturing Construction 1991 1 101. while the volume of production has been steady at low rates of utilization over the past three years. Specifically.7 IV 1993 101. new technological techniques and improving "information superhighways" have already allowed companies to become geographically fragmented.1 1992 1 101. At the same time.5 103. What is of great interest at this moment is the reaction of the Bank of Canada as it simultaneously tries to balance the interests of a number of groups. Such an action could be one of the most irrational acts this century.9 100.9 132.5 11 101.

be on the down side considering the negative short-term effects outlined above. Currency Outlook The Bank of Canada will continue to balance the interests at this point in time. but the actual outcome. This will be a great challenge over the short-term as the political campaign and outcome will become the focus of attention. 78 cents U. will not have any substantial effect on the real economy or on further progress in the trade negotiations. National. Liberal. foreign investors will monitor the reactions of Provincial governments. The present day political map can be envisioned between the traditional parties and three new regional ones: Traditional/National: Conservative. 50 . New Democratic Party Regional: Bloc Quebecois. In addition. being very careful to avoid any major foreign sell-off in the Canadian bond markets. a range of 0. Reform The uncertainty will be a drain on the Dollar. With the number of official parties increasing to six from the traditional three. 7 7 would be fitting given the circumstances.72 to 0. the possibility of a fragmented coalition government is very real. The pressure bias will. the Canadian dollar is very unlikely to exceed its equilibrium competitive rate of 0. however. this will bring about a situation similar in many ways to the gridlock that has been experienced in several European countries. Consequently. especially in Ontario should there occur further budget shortfalls.G7 Books In addition.S. Over the next quarter. whatever it may be.

25. stagnant economic performance over the past three years coupled with an unprecedented campaign of corporate re-structuring and down-sizing. if individual results such as the recent Canadian election are to be fully understood. by majority support • Ontario debt downgrade for third time in as many years • majority government helps to stabilize Dollar • Bank. With the ruling Progressive Conservative party almost entirely wiped off the Canadian political-ical map.overshoots original forecast by $15 billion • inter-provincial trade wars erupt between Ontario and Quebec • budget problems due to sluggish revenue rather than overspending • commodity prices such as wood and newsprint remain weak • big test for Dollar to come as Quebec holds elections in 1994 Economic and Financial Overview The discontent displayed by the Canadian elec-torate as demonstrated in the Federal election results on October. Reform Party of Canada) at the expense of the tra-ditional left-wing socialiststhe New Democratic Party and the Progressive Conservatives men-tioned above. of Canada Governor John Crow's 7 year term ends in January 1994 • federal budget.Fourth Quarter: October 12. prompted the electorate to release their anger on the political party of the most unpopular contemporary Canadian Prime-MinisterBrian Mulroney. The new political alignment includes two new powerful regional parties (Bloc Quebecois. 1993 is no different from most other industrialized countries at this very moment. 1993 • Jean Chretien becomes new Canadian Prime Mu-minister • the Liberal party is elected. The result is not too surprising when the indus-trialized countries of the G-7 are placed into a global context. This is an absolute necessity under present geopolitical and economic events in the world. 51 .

This would not only include traditional markets such as the U. The electorate of whom shares a similar disillusionment. is the fact that Canada was one of the first industrialized countries to experience unprecedented re-structuring. and will continue to do so. Such scenarios have already impacted the real industrial sector of Canada's economy. since recent Canadian economic and political experiences may shortly be shared by a number of countries there. which has almost become a magnetic attraction to North American industry. With the recent net addition of the natural resources of Russia.2 billion strong Chinese market. Canadian natural resources for export must compete with an even larger volume of Russian wood. Number of Parliamentary Seats Held By Canadian Political Parties Political Party New Alignment Old Alignment Progressive Conservative 2 157 80 Liberal 178 44 8 New Democratic Party Others & Vacancies 0 14 0 54 Bloc Quebecois 0 52 Reform Party of Canada 0 1 Independent 295 295 Totals 52 . unprecedented technological changes have temporarily displaced a large portion of the labour force in the G-7 countries. while at the same time causing great disloca-tion. it may be wise for countries of the European Union to take note. this natural process of evolution has combined with the recent opening up of areas in the world which were previously off limits to free markets. Simply put. To a large extent. In fact.S. when the Russian and Chinese markets were off limits only four years ago. The same goes with the new 1. with the general process of de-industrialization. but also thelarge number of recent entrants into the world market. has opened up great opportuni-ties. the G-7 was able to enjoy an artificially high standard of living.G7 Books What is of some interest. Specifically. as in the contem-porary Canadian experience. The challenge is for Canada to take advantage of the new environment by adopt-ing an aggressive export stance. aluminium and coal today. However.. since the resources of the other half of the world were not available participants in the markets. the enormous human capital of China and eastern Europe to the existing pool of world resources.

the Bank of Italy and the Bank of Japan have joined the German Bundesbank and the U. natural attrition of jobs through technological changes e. This has very serious revenue collection repercussions. Federal Reserve as independent central banks. chronically high tax rates at all levels which have encouraged less work effort and a high degree of tax evasion together with a rampant black market economy d. or have set up a selfemployment practice c. In short. then the Dollar will shift downwards to a new lower trading range vis-a-vis the U. since once again the actions of John Crow and the Bank of Canada must be placed in a relative international perspec-tive. as taxes are no longer conveniently deducted at source. if the fiscal finances continue to deteri-orate on a relative basis vis-a-vis the record of other G-7 members. Although low inflation is now the norm. but are collected under trust that a self-employed individual fully declares their income. Hence leading to ever more revenue shortfalls.S.S. the Bank of France. Recently. re-location of labour intensive industries to lower wage areas of the world b. Dollar.This process of on-going re-structuring has enormously impacted Federal and Provincial gov-ernment revenues. the criticisms in this respect cannot be further from the truth. The solution to the entire problem of tax evasion is a lower income tax rate along with cutbacks in social services and a programme of continued privatization. The rampant black market economy ensures that the government will not be able to tax an ever larg-er proportion of economic activity. Furthermore. the monetary side under the lead-ership of Bank of Canada Governor John Crow has come under serious attack recently for its pursuit of a zero inflation goal. 53 . The shortfall can be attributed to some of the following reasons: a. high wage corporate redundancies who have decided to accept lower paying employment in the service sector. regional sectoral recession in areas such as real-estate and property development and natural resource exports Canadian Dollar Chaos What is interesting to note is the fact that a growing segmented workforce which is self-employed is becoming a more common occurrence in industrialized countries such as Canada.

76 cents. In other words.S. over the long-term it has the potential to generate inflation which will not solve the long-term structural unemployment problems of industrialized countries like Canada. Canada is much too small a global player to take an initiative such as this all unto itself. yes. then it is highly probable that the Dollar settles in the lower end of this range. If a far-reaching change such as this must be made. economy. without experiencing a serious fall-out over the longer term. But.G7 Books What this means is that monetary policy is determined without the influence of politicians. With the advantage of having the recent experience of the U. then Canadian financial markets suffer and the Dollar plunges. Federal Reserve.S. how he is able to maintain a borrowing require-ment that is comparable to other industrialized countries.but to re-appoint John Crow for another seven years. at 0. Since politicians always look for short-term solu-tions to problems. hence spilling over into Canada. But. begins to stagnate in any way. this does not always work. if a majority of the other members of the G-7 decide that a cred-ible and independent central bank would best serve them over the long term.72 -0. 54 . John Crow can be replaced by a politi-cal appointee and preferably a politician from the Ontario New Democratic Party. In that respect. Recent rhetoric opposing the re-appointment of John Crow fails to place the workings of the Bank of Canada within an international context. If John Crow is not appointed.S. Currency Outlook What is important to watch over the next quarter is how the Chretien government attempts to bring the Federal deficit under control. If the U. The ease to which this goal is attainable is dependent to a large extent on how robust the recovery is in the U. then let us all make sure that a majority of the industrialized countries also do it. then the chances of reducing the deficits in line with the other G-7 members will be much more difficult.just as he didn't have any real choice under Nafta. any control over a policy lever such as money would tempt them to ease up on credit liquidity. This factor will preoccupy the markets over the next quarter and should see the trading range of the Canadian dollar vis-a-vis the U.S. in order to achieve greater levels of employment. Jean Chretien has no choice. In other words.

Short of any dramatic at this point in time presents very difficult choices. the fact that the U. since the trade.2% at end of 1"3 • dollar under pressure as short.First Quarter: 1994.S. Moreover. it doubtlessly will reemerge as an unstable element if the upcoming budget does not address the $45 billion fiscal deficit. While this did not cause an immediate panic.000 additional manufacturing jobs eliminated • uncertainty mounts as Quebec election expected in fall of 1994 Economic and Financial Overview The resignation of former Bank of Canada Governor John Crow is one among a number of factors that may lead to a dollar crisis. 1993 • Bank of Canada Governor John Crow replaced by Gordon Thiessen • Finance Minister Paul Martin Jr. investments.heated economy. The combined effect of all these factors will be difficult to overcome.term securities were able to offer investors.term rates approach U. the pressure will culminate in an eruption which will send the dollar spiralling down- 55 . tables new budget • Liberals announce measures to reduce dfense expenditures.S.structuring in the Canadian government bureaucracy. Federal Reserve has just moved to raise its short-term Federal Funds rate (valid on interbank loans) to counter an over.2% to 11. rates • January/94 official unemployment rate rises from 11. will undermine the historic premium in which Canadian short. • public debate held on tax and social security reforms • current unofficial rate of unemployment stands at 26% • Canadian general government debt at 86. This will divert capital flows away from Canada and into U. December 18.4% • 48.

This has not happened.G7 Books wards. is the worst.D.S. With the U. although diffi-cult.over effect. Immediately to be followed by a program which retires most government employees above the age of 52. And only the growth of debt accumulation in Italy and the U. employment after pursuing a very easy monetary pol-icy. it is very interesting to note that Canada's debt to G. The inability to generate growth and reduce its traditional partner hasthe United States.the United States. and offers a scheme whereby these talents can be diverted into the private business sector. we cannot stress more the importance in which such decisions are interpreted within a relative context among all advanced industrialized countries. it is important at this juncture that Canada is also seen as a country which is enacting measures in order to improve its fiscal finances. and be followed by lower taxes and easier access to business and venture capital. is what is needed on a relative basis vis. Such a structural change.P. As the following table indicates: To reiterate. and now it must be prepared to enact some very difficult measures in order to main-tain the strength of the dollar. economy to pull it out of recession.7.S. save Italy.vis similar actions on behalf of other industrialized coun-tries within the G. acts decisively to cut the top. experiencing a recovery for over a year now. This re-deployment of the civil service into areas of productive use must be co. For that matter. Canada has waited long enough for the U.K. On a relative scale. 56 .S. Once again. in order to move the country out of its present state of stagnation.ordinated with the Provinces. Therefore. Finance Minister Martin has an unenvi-able task on his hands. it is essential that Finance Minister Paul Martin Jr. can be matched to the Canadian scenario over the past three years.heavy Canadian military. recoveries have enabled exports to accelerate Canada out of recession. This has turned into a far more serious proposition. leads to the suggestion that the present state of the Canadian bureaucratic superstructure must come to an end. since Canada has not near-ly experienced the recovery to the same extent that its traditional partner has. in the way that past U. Canada has yet to participate from the traditional spill.a.

which is inevitably accompanied by real spending cuts.67 to 0. or raising taxes will continue to stagnate the domestic economy.2 66. Any moves to avoid these hard choices by further plugging tax loopholes. General Government Debt (% Debt to GDP) Canada(b) France Germany Italy Japan (b) U.3 68.74 to 0.0 52. is raising its short.78 range.9 63.term rates in order to counter its robust recovery.vis the U. 1993 Source: European Economy.8 66.a.2 41.5 112.6 65. pending a successful budget. only spending cuts will offset the natural tendency of the dollar to fall now that the U.72 range vis. U. 1991 77.6 48.K. while Canada is still reducing its rates to counter stagnation. the dollar could drop to the 0. dollar.9 106.0 50. Otherwise. In that sense.1 45.2 1993(a) 86.5 45.4 48.1 (a) 1992 and 1993 data are Commission forecasts (b) Source: OECD Economic Outlook 53. it will trade in the 0.S.2 52.2 45.8 1992(g) 83.organisa-tion of the Canadian bureaucracy.1 59. June. Annual Economic Report 1993 57 . The danger is that if for-eign investors do not perceive the budget as seriously addressing domestic stagnation.S.0 101.S.Currency Outlook Canadian Dollar Chaos In order to save the dollar. the Liberal government must reduce its deficit through a radical re.

net government debt has virtually tripled from a level of 30. it is not wholly a question of apportioning blame to one particular government or 58 . In this case. As technological change and the integration of new countries into the multilateral trading system proceeds.up from 30. when governments are either unwilling.6% in 1982 • provincial foreign debt doubles to $120 billion over last 5 years • Japanese investors become net sellers of Canadian debt • 30% of net Canadian debt ($266 billion) held by foreigners Economic and Financial Overview Recent evidence confirms the view that in a period of deflation. This problem becomes ever more acute. In the Canadian situation.First Quarter: February 14. 1994 • February 1994 budget reveals plan for gradual deficit reduction • defense spending reduced by $7 billion over 5 years • dollar falls to historic lows • Moody’s Investor Services places foreign cumrrency debt in review • unemployment falls from 11.6% of GDP in 1982 to 93% at this very moment. or unable. the proportion of debts to assets accelerates upwards.2% in fiscal year March 1994 • net government debt presently at 93% to GDP. while the expenditure side must still contend with the national demands of a constitutional democracy.4% in January 1994 to 10. the revenue base of a national budget is more and more determined globally. to curtail the degree to which they participate in an economy.6% in March 1994 • bonds experience worst decline in over 12 years • net government debt rises 11.

if currency and financial market turbulence is to be avoided. The danger at this point in time is that these forecasts were made shortly before the Canadian dollar came under speculative attack. debt will continue to grow. The entire crisis would have been entirely averted. Specifically. Canadian Dollar Chaos 59 . revenues have become more difficult to collect now that trade and investment flows have become liberalized. the basic rights and demands of citizens from their governments. then it will not be too surprising if the Finance Minister is forced to introduce a mini-budget to address the disparities. A major constraint on the policies of any political party in a constitutional democracy. Once again. 17. Unquestionably. and eventually raise the short term bank rate back to its historic spread with the United States.another that has governed the country in the recent past. has led to a completely different environment on the revenue collection side of the budget. For countries like Canada. Admittedly. the most difficult actions inevitably have to do with austerity on the expenditure side. defense expenditure reductions by $7 billion over 5 years.0 billion to the above forecasts. In addition. the budget high points include: no new taxes. which was designed to implement austerity very gradually. Finland and certain members of the European Union. recent changes have delivered a severe shock to their political systems. Over the short term.5 to $2. Shortly afterwards. the Canadian dollar came under heavy attack. if only Canada was not geographically adjacent to a super power to her immediate south. technology and the persistent re-structuring. If the current pressures persist. which forced the Bank of Canada to intervene in the currency market on several occasions. Finance Minister Paul Martin Jr. In that sense. shortly after the Quebec Provincial elections. Consequently. has not kept pace with the new global industrial reality affecting national revenues. capital gains exemption reductions and a public service salary freeze. Sweden. the "Interest on Debt" has already been estimated to have added an additional $1. are the periodic recurring elections that exist usually every 4 to 5 years. any progress to reduce the imbalance between revenues and expenditures must be co-ordinated between all countries. which continues to show good economic fundamentals. had tabled a budget last February. The budget forecasts are presented on p. 1994. As Canadian citizens continue to demand what they believe to be their basic rights in society in a continuously changing global environment. combined with recession over the past three years.

7 The budget has not convinced foreign investors to remain exposed to Canadian dollars.7 9.0 -32. Moreover. This very moment represents a bad period for Canada. it is expected that Quebec will remain a part of Canada. coming just months before another Quebec Provincial election.11. it comes at the worst time.S. since this is the first reversal in foreign investment flows from Japan since 1976.2 to 0. The current specu- 60 . This is a situation which may escalate trade tensions with the U.5 -45.3 -42. this reversal will not be the prelude to a general movement away from Canadian dollar denominated debt instruments over the next several quar-ters. when placed in a his-torical context. just when flows ought to be accelerating into Canada to service the growing debt. even under Nafta (see article by Rugm.8 -7.7 95M 132. dollar. will come under growing protests from producer interests in Congress.7 -121. and any moves to acceler-ate the outflow of foreign investment will lead to much higher interest rates and a weaker dollar.0 -39. However.$3. and Warner in Vol. the uncertainty surrounding the entire issue. However.0 -122.$ billions) Revenues Expenditures Operating Surplus/Deficit Interest on Debt Budget Deficit 93/94 114. Any use of a weaker dollar to cheapen exports to the U.V). The long-term fundamentals point towards a very gradual reduction in debt levels. Evidence points to the fact that domestic U.G7 Books Currency Outlook Federal Revenues and Ex penditures (February 1994 forecasts) (Cdn..S.S.6 1.S.9 -122. No. The recent re-patria-tion of Cdn. markets is more certain than ever before. Hopefully. pro-ducer interests will not tolerate any unreasonably low levels in the value of the Canadian dollar.7 94/95 123.1 -38.4 billion by Japanese investors is a disturbing signal. and Canadian access to U.3 -41. is worth a political risk premium that is estimated anywhere from 0.5 cents to the U.S. again based on the theme of separa-tion from Canada. there is also an important political limit to a fall in the Canadian dollar. Given that the North American Free Trade Agreement (Nafta) is now being implemented. given the enormous economic risks that an out-right move toward separation will exert upon itself..

lation is that levels in the mid-$0.60 cent range relative to the U.S. dollar, may result in political moves in Congress which favour an I.M.F. solution to the growing Canadian deficit. Consequently, in respect to the above considerations, it would be conceivable to see the Canadian dollar trade in a range of 0.68 to 0.73 cents to the U.S. dollar over the next quarter.

Canadian Dollar Chaos


Second Quarter: April 22, 1994
• United Nations rates Canada as having highest standard of living • attention turns towards the Quebec Provincial elections • public debt charges rise by 0.6% in April 1994 from 1993 • business credit continues to decline • consumer and mortgage credit on the rise • current account deficit widens • debt rises higher than in any other industrial country • debt and political risks force real long-run rates to exceed 9 percent • surge in demand for automobiles raises capacity utilisation rate • net international reserves at all-time low
Economic and Financial Overview All eyes have turned towards the upcoming Quebec provincial elections. The ruling Federalist Liberals under Premier Daniel Johnson must confront a popular Parti Quebecois under Jacques Parizeau. Should the latter win, pron-dses of an early referendum on Quebec's eventual separation from Canada will instill an atmosphere of fear and panic in financial markets indefinitely, and perhaps for the remainder of this decade. Never have the stakes in previous rounds of Quebec separatist fever been as high as they are this time around. In addition to this political crisis, Canada is faced with very serious questions concerning the overall climate of economic under performance. With the US recovery now going into a phase of consolidation, Canada seems to have missed the entire upturn. A divergence from the historical norm. What makes separation far more desirable for Quebecers in the upcoming elections, is that they will be able to cast their votes on political and economic considerations. Unlike past referendums on separation which have been conducted in good economic times, any referendum now will come at a time of record unemploy-


ment and de-industrialisation. An economic climate which often leads to dangerous political outcomes. Assuming that the governing liberals under Daniel Johnson win. Quebec will not face a referendum, but Canada will still need to face one on its economic performance. The problem over the past three years, was that economic restructuring and overall industrial decline have been far more vigorous in Canada than in most other countries organised under an Anglo-Saxon system. Unfortunately, neither the countries' elected representatives nor the electorate who put them in office, have grasped the overall geopolitical changes in the world which have forced such an environment. For this, it would be very difficult to directly accuse anyone of mismanagement. What is known, however, is that the present low inflationary climate in the industrialised countries, together with freer trading and investment arrangements, have adversely impacted all resource-based, protectionist j urisdictions such as Australia and the Scandinavian group of countries, in addition to Canada. What is becoming very clear is the extent of the protectionism that has been offered to low-skilled, undesirable industries. Industries which as soon as the barriers came down, picked-up and settled in some of the most low-cost and unregulated regions in the world. A situation that is not as visible in pro-ductive, high value-added industries, that are more usually than not, located within countries such as the US, France, Germany and the Netherlands. At a micro-level, the problem of channeling credit to finance produc-tive ventures has been virtually absent. There exists a severe problem in the process of intermediation within most Canadian financial institutions. The familiar theme of virtually nonexistent venture capital in the country becomes even more frustrating, when under a global environment of freer trade and easier access to larger markets in the world, the major portion of the coun-try's credit is reserved for sectors that only marginally figure into the coun-try's overall productive export strength (while developing a massive branch banking super-structure to assist indi-viduals with their purchases of real-estate, productive export industries usually do not figure into the overall equation). Under the present geopoliti-cal structure in which the whole world is heading, this should not be allowed to exist. As the table (above) illustrates. While the economy is being constrained by such institutional factors at work, the level of political debate by the elected representatives leaves a lot to be desired. Not only are most of the locally-minded politicians completely mystified by the ongoing economic under performance, but the general populace at large can be worryingly described as being uninterested at best in the broader international factors

Canadian Dollar Chaos


S.73 cents range. the immediate financial and currency market euphoria would send one Canadian dollar below 0. the political turmoil would temporarily become a sec-ondary consideration to the pressing economic questions. the first signs of difficulty would appear in the refusal of foreign investors to add any further Canadian dollar denomi-nated assets to their portfolios. The immediate euphoria over the victory of the Liberals in Quebec would temporarily raise the dollar trad-ing range to 0. foreign investors would need to have some signal of change primarily in the spending levels in government. In order to sustain this level. and secondarily in the process of bank credit intermediation and overall industrial policy.4 1988 1989 1990 1991 1992 1993 All figures are Rates of Change Based on Seasonally Adjusted Data Source: Bank of Canada Review 64 . Such an oscillation will continue until the eventual outcome is known in the Quebec referendum. This would immediately lead to an IMF brokered solution to the problem. this will recover after several weeks to the present 0. further hard choices would be required.70 cent level.8 14.70 to 0. With recovery only based in the present pent-up demand being felt in the automotive sector.76 cents to one U.73 to 0.8 15. otherwise. once a definite referendum date has been fixed. If separation would be the eventual outcome.0 11.5 1. if the Liberals under Daniel Johnson win. However. Canadians must prepare them-selves for possible IMF intervention.2 9.1 8.70 cents U.73 to one dollar US.6 2. the market jitters would again send the dollar below the 0. However.2 9. However.4 7.3 3. Year Total Business Credit 10. Currency Outlook Under the most likely scenario of a Parti Quebecois victory. expect a continuation within 0.5 Residential Mortgages 15.68 to 0.S. dollar.G7 Books influencing present economic restruc-turing.

The prognosis of improving demand for Canadian natural resources. However.Third Quarter: September 25. Despite the fact that both monetary and fiscal policies are continuing to move towards austerity. will be somewhat restrained over the continuing reluctance of the banking system to lend to small businesses and the property development sector. Although the separatists under Jacques Parizeau won a majority of 77 parliamentary seats of the 125 total. 1994 Quebec election campaign. the markets turned to the popular vote. the dollar managed to free itself from most of the political risk associated with the possible break-up of Canada. 1994 •Parti Quebecois wins election by narrow margin •popular vote shows strong support for federalists •referendum may be postponed until support rises •dollar rises as political risk diminishes •Eurobond maturities prompt heavy reinvestment •Confederation Life insurance company collapses •raw materials exports surge aided by low dollar •Canadian bond yields perform best in August/94 •credit agencies downgrade provincial debt •current account deficit widens over debt charges •small growth in wages reported •automotive sector to save Canada from recession With the strong showing of Daniel Johnson’s Liberals in the September 12. will go a long way in generating optimism over the prospects of recovery in the latter half of the decade. the mere fact that the average age of both passenger vehicles and commercial trucks is far above their historical replacement life. The overall effect. as well as the enormous pent-up demand that will be experienced in the automotive sector. is expected to pull Canada out of its lingering recession. as the true indicator of the eventual success of a referendum on Quebec’s independence from Canada. however. the planned referendum on independence to be held within the ensuing ten month period. 65 . Consequently. is fast becoming a farce.

Unless monetary policy is pursued more aggressively. manufacturing unit labour costs have experienced the greatest relative reduction in Canada. compared with an average production rate of 2. was the natural wear and tear (depreciation) in the stock of machines and automobiles (pent-up demand).500 more votes in total than the ruling Liberals. The fact of the matter is that monetary policy has been so stringently orthodox over the last five to six year period. (See table I) The question surrounding the nature of the Canadian recovery.0 million units throughout the period 1990 to 1993. it will be very much a “natural” recovery.254. The increase in production represents about 25 percent more units produced on average.502 in the period 1990 to 1993. Parizeau may 66 . has been so severe in the past four years. and in turn how far this will all go in generating more growth in the service sectors? And ultimately.479. From an average sales rate of 1. in order to cover the burgeoning deficits of all three levels of government? Early evidence from wage growth rates. in the latter half of the decade.565 in the period 1995 to 1999. Daniel Johnson and the federalists won the Quebec election. average Canadian sales in the latter half are expected to rise by 18 percent. Mr. As table II shows. of all industrialised countries. to an average sales rate of 1. at the end of the decade. do not yet lead one to believe that this may happen. will the increased activity enable tax receipts to grow. Such policy considerations must be addressed before the current rise in pent-up demand is expected to run out. that it may take a further year or two for the positive effects to emerge in higher levels of personal and family income. In fact.4 million units until 1999. centres on to what extent the robust recovery in the automotive sector will affect the spin-off parts industry. This. without any help from either fiscal or monetary policy. Likewise. Given that the Parti Quebecois received only 13. If there is ever a case to be made in favour of re-inflating. Currency Outlook From the viewpoint of financial markets. the Canadian lengthy recession is a textbook example. the production of all vehicles in Canada is expected to rise to a sustained level of 2. In essence.G7 Books Just as in the case of Germany. the prospect of conducting a successful referendum campaign is quickly receding. that the only engine remaining to lift the country out of recession. the duration of the trough in the business cycle will get longer and be very damaging to the social fabric of the country. The process of de-industrialisation in the provinces of Ontario and Quebec.

and cover the enormous debt burdens created by all three levels of government. In addition. with the political risk premium no longer a pressing concern. And every successive public opinion poll. will be in the growth of personal incomes and employment levels. Therefore. if it will generate enough activity to raise tax receipts. The expectation is that the natural economic recovery will go a long way in capturing the headlines. Early signals to this being successfully fulfilled.78 range with respect to the US dollar. until the final day of the vote will cause movements in the currency markets. if a referendum is called over the next ten month period. in the sense that a robust recovery in first the automotive sector and raw materials. in accordance to the attitude of the Quebecois. and postpone the vote altogether. However. it will inevitably affect the risk premium attached to the Canadian dollar. as promised. the best it will be able to do is 0. will tend to even further relegate separatism to being a secondary issue. However.72 to 0. the natural recovery on the real side of the economy will favour a rise to the 0. Canadian Dollar Chaos 67 .75 to the dollar.find it wise to take the advice of the leader of the Federal Bloc Quebecois. This is vital. until public opinion is willing to risk independence. Lucien Bouchard.74 to 0. the present phase of recovery will be under scrutiny. with an inactive fiscal and monetary policy.

783 1996 2.841 1993 actual 2.000 1.646 1.G7 Books Canadian Vehicle Production and Sales (Table I) Year Units Produced Units Sold 1990 actual 1.528.4 4.000 1.001 (tracking) 1995 2.500.200 1.517.2 0.284.947.1 4.8 5.5 8.227.887.000 1.501.7 1.296.6 2.4 4.500.3 13.200.351 1997 2.167 1994 scheduled 2.5 4.495 1998 2.2 4.106 1.950.000 1.056 1992 actual 1.188.9 Source: Bank of England Quarterly Bulletin.4 1.287.301.000 All vehicles include both automobiles and trucks Source: DesRosiers Automotive Consultants Using Industry Data Percent Changes in Manufacturing Unit Labour Costs (Table II) Country Canada France Germany Italy Japan US 1991 -2.500.400.365 1.237.733 1.450. 1994 68 .3 1992 -2.5 1.572 1.0 1993 -2.401. August.000 1.5 -1.314.9 1.992 1994 forecast 2.118 1991 actual 1.449.195 1999 2.

70 US in the fourth quarter of 1994.5% of GDP $ reduction in 1995 immigration quota by 12% $ consumer prices register a 0. the immediate euphoria in financial markets has been replaced by resurgent reservations about the abilities of the present Liberal government to carry out the promised reduction in the deficit for 1995-1996.First Quarter: January 5. or 3. however. The popular opinion in Quebec continues to show overall support for the Canadian federation. there still remains the possibility of provincial gridlock.2% rate of deflation $ industrial restructuring causes labour input to fall by 20% $ automotive industry expected to generate record profits A fter scoring a post-election dividend in the aftermath of the Quebec elections in September 1994. has announced that the February. despite the fact that credit agencies continuously deliver downgrade after downgrade.5% of GDP. as both Quebec and Ontario (two of the wealthiest provinces) resist the trend to lower debt levels.0 billion extra in revenues over the second half of 1994. as recent life exhibited in the economy from pent-up demand in the automotive industry has generated some $5. challenging 0. 1995 budget will contain draconian fiscal measures. At this very moment. the dollar found itself on the downside once again. Finance Minister Paul Martin Jr. the government is showing tremendous faith in the natural recovery. Success in such a strategy of patiently waiting out the current budgetary impasse. designed to reduce the present deficit of some $40 billion to $25 billion. may prove to come out short. If accepted at face value. As the present cycle of recovery will 69 . 1995 $ financial markets anticipate February 1995 budget $ rising real interest rates threaten large debt levels $ US rate increases pose challenge to Canadian recovery $ historical spread on US and Canadian rates narrows $ foreign debt at 44% of GDP used to finance consumption $ current account deficit to attain 2.

By having to defend the value of the Canadian dollar constantly. with consumer price deflation being the present condition. A situation which has not been too far off the mark most recently. and with continuing long term rates at about 8 to 9 percent. which continues to lose real value. 70 . and which by some conservative estimates is still some 50 percent overvalued. As the US Federal Reserve has raised its short term administered rate by 0. before Canadian securities are dumped on international capital markets.G7 Books prove to be far more shallower than in the past. Moreover. Since foreign investors expect the historical yield spreads between US and Canadian financial instruments with similar risk profiles to be maintained. it was reported that the manufacturing industry uses 20 percent less labour now. A recent report commissioned by the Paris-based OECD has concluded that the period 1989 to 1993 witnessed the most severe restructuring in the industrial base since the Second World War. the Bank of Canada has found itself in a position where it must raise real rates under a condition of domestic deflation. Only 20 percent of the growth in income can be attributed to new workers absorbed in the production process. Any termination in this cycle of pent-up demand could produce disastrous results. The prime example of which is the battered real estate sector. A backdrop to the entire problem is the fact that much of Canada’s foreign indebtedness. who cite the fact that growth has been on a recovery trend and that Canada is expected to be one of the fastest growing among industrialised countries in 1995. as some 80 percent of the income generated in the present upturn is derived from a more efficient deployment of the existing pool of workers. plunging the Canadian economy back into a state of heightened recession. any narrowing of this gap is not expected to be tolerated for too long. In fact. it continued by asserting the view that the “jobless recovery” is expected to continue. Evidence presented indicates that costly Canadian labour supply has been replaced by technology and machinery in the production process. Monetary policy continues to be inactive. has been directed to financing an artificially inflated standard of living. The lingering problems that are re-surfacing on Canada’s international accounts present an alarming signal for all investors exposed to Canadian dollar denominated certificates of investment. the domestic economy is being deprived of a more beneficially active monetary policy. than it had prior to 1989. However. amounting to some 44% of GDP. the breadth of the present recovery is being supported solely by pent-up demand.75 percent. This argument may very well be refuted by current commentators on the Canadian economy. as the Bank of Canada is forced to side with foreign investors by maintaining artificially high real interest rates.

The duration of the expansion is expected to continue until 1998. the most pressing concern on the minds of Canadian citizens and investors alike. which has resulted in two vehicles being produced for every one sold in Canada. curtailing spending on consumer goods and imports. a surplus on the international trading account would be the only alternative. The most likely developments will ensure that the Bank of Canada maintains high real interest rates. as was reported above on several occasions. Although the likelihood of Quebec separating is very small. and that the Federal government delivers a combination of higher taxes and lower regional and industrial subsidies. as interest payments on the stock of foreign debts are causing the need for continuing capital inflow from foreign investors.Despite operating under a merchandise trade surplus. along with some symbolic cutbacks to the Canadian Dollar Chaos 71 . Major reductions in social spending should not be anticipated at this point in time. investment spending on new plant and equipment will suffer only to the extent that existing pent-up demands may lead to higher levels of production. However. the ruling Liberals have only hinted at a combination of tax increases and minor social program re-allocations. pent up demand arising out of the automotive sector has been the pillar of the improvement in economic fundamentals. the basis of which has been aging vehicles and the North American Free Trade Agreement. is the substance in the all important federal budget promised in February 1995. before investors rush to dump their Canadian securities. the imbalance on the Canadian international accounts is bound to get even more serious. Overall. Causing unprecedented pressures on the social welfare system. Since yields that transcend the historical Canada-US spreads become indispensable in attracting much-needed foreign capital. the overall international exposure is faced with continuing deficits. causing capital to accelerate its outflow. With the US economy nearing its peak in performance. an end to pent-up demand could cause even more pressure on the already high real rates to increase even further. the rhetoric leading up to the referendum will have an effect on the dollar. Up to now. Since most of the merchandise trade surplus is with the US and Mexico in the automotive trade. Presently. The current danger is that if the upcoming February 1995 budget does not curtail the bloated deficit. The alternative of having a further devaluation in the Canadian currency can only go so far. Higher taxes will work to reduce disposable incomes further.

the dollar is expected to trade within the 0. However. the tight money policy together with the prevailing high real rates of interest has been tacitly accepted by politicians without resorting to criticism. The tactic seems to be entirely based on faith in the growth of the economy. and with taxes on Canadians already at their limits. as is expected. with current account deficits being mainly a structural problem. through the performance in the auto sector. through necessity. The government is fully aware that the massive foreign debt exposure of some 44 percent of GDP poses a major constraint on domestic policies. implemented by an independent Bank of Canada has become somewhat of a blessing to the government. it will be difficult to convince many investors that Canada has reached the end of its historically stable place in the world. an inactive monetary policy. The danger being that Canada has missed out on the two solid years of economic growth in the US. However. Yet still. Whether the budget will deliver the much anticipated result is anybody’s guess. when the precarious state of the international accounts are considered. Although adversely affecting most citizens. In that respect. 72 . hence increasing the tax receipts collected. Moreover.69 to 0. most will still look to achieve some spread over comparable US denominated securities. cutbacks in the upcoming budget are not expected to be deep enough in order to give a further boost to the merchandise trade surplus. the Bank of Canada will have no choice but to follow suit.73 cents range to one US.G7 Books military. The flipside of which would cause a severe devaluation in the dollar. and even lead to greater problems as investors bail out of their “cheapened” investments. And should the Federal Reserve continue its program of higher short-term rates to quell the record strains experienced on US productive capacities.

921 8.460 16.2 27.171 4.0 50.8 25.454 48.776 12.Canadian Automotive Trade (Millions) Exports Assembled Vehicles Vehicle Parts Total Exports Canadian Dollar Chaos Total 1992 28.378 18.1 18.227 38.006 12.352 10.858 19.483 23.1 Imports Assembled Vehicles Vehicle Parts Total Imports Balance Assembled Vehicles Vehicle Parts All Auto Products Source: DesRosiers Automotive Yearbook 73 .0 21.601 27.375 39.398 33.579 15.523 -10.7 79.5 33.6 7.974 -8.803 Total 1993 %Change 36.

must convince not only the international financial markets. using any excuse.7 percent decline in real disposable incomes & growth in consumer spending financed by savings shortfall $ personal savings fall by 6. The crisis has caused many investors and commentators to re-evaluate Canada’s economic performance. to drive down its value.7 percent to their lowest level in 23 years The Canadian dollar has hit new lows vis-a-vis the US dollar. 1995 $ attention focused on all important budget due in February 1995 $ budget impact expected to last until the second quarter of 1995 as investors continue to evaluate impact $ indications that Finance Minister Paul Martin Jr. The severity of the Mexican Peso crisis prompted vigorous attacks on the dollar by currency traders. The timing for a large scale reduction in the deficit could not be more opportune than in the prevailing 74 .0 percent in 1994 representing the highest in six years $ pent up demand beginning to show positive effects in employment growth $ 2. and for a very brief moment crossing to the psychologically important 0.First Quarter: February 10. but an increasingly restless citizenry that his government has full control of the situation. by placing recent developments under far greater scrutiny than usual. In his budget. even if completely irrational. expected to aggressively bring down deficit $ current deficit of $40 billion expected to fall to $26 billion from $7 billion in tax increases & $7 billion in cuts $ current growth in automotive assembly & parts sector begins to spread to related industries $ real GDP grows by 5.69 cent level. Canadian Finance Minister Paul Martin Jr.

climate. The Finance Minister’s window of opportunity will be closed if he is unable to deliver major reductions in spending. For this task the current climate is favourable, and he is aided by a number of unrelated factors: • the Mexican Peso crisis could not have been better timed for the task that awaits the Finance Minister. The crisis and fall-out from this has brought to the attention of the Canadian public, just how fragile international markets have become, and just how vulnerable the domestic economy is to events that happen in an increasingly inter-related global marketplace. • current record Canadian growth rates driven by pent-up demand in the manufacturing sector and falling unemployment, are providing a climate that is favourable to budget austerity measures. • recent successes in reducing spending by Premier Ralph Klein in the Province of Alberta has established a precedent and provided early evidence that austerity can be a possible option. • the current rhetoric out of Washington D.C., with the newly-elected Republican majority in both houses of Congress has promised smaller government, which may have some spill-over effect in Canada. According to leading Canadian economist Jayson Myers, the government is determined to deliver a balanced budget towards the end of the decade, with a possibility of exceeding the self-imposed 3 percent to GDP deficit guideline. Any back tracking at this point would definitely send a signal that the government is not in control, causing further uneasiness in financial markets. Myers asserts that the key issue that faces the entire nation, as well as most other industrialised countries, is how can a government practice austerity and grow at the same time? Up to this time, most industrialised countries have been attempting to do so by either encouraging exports to non-industrialised countries throughout the world, or have resorted to, either by design or default, to devaluing their currency. The current export promotion trip by Prime Minister Jean Chretien to Latin and South America and to China is a perfect case in point. The fact of the matter is that an inactive monetary policy over the years, will shortly be joined by an inactive fiscal policy. Solely relying on pent-up demand considerations to drive domestic economic activity. This seems to be the chosen path of most industrialised countries, leaving the all important question: how can we cut and grow at the same time?, at the centre of political debate over the coming year.

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After all is said, the consensus scenario for the upcoming budget, according to Myers, will most probably lead to some balance between raising taxes and reducing spending. A reduction of $14 billion, from the current $40 billion deficit, to $26 billion over a time period of two years, will see a saving of $7 billion per year. This represents about a 1 percent reduction, out of a total Canadian Gross Domestic Product (GDP) of $750 billion in each year. In other words, a forecast of 3 percent growth over the next two years, will result in an overall net growth of 2 percent after the implementation of the cutbacks. At this moment, every move that Finance Minister Paul Martin Jr. makes will be under the scrutiny of financial markets. If the expected cutbacks are not delivered, or if they are by a far larger increase in taxes, the dollar will come under speculative attack. Any tax increase, must be balanced by a corresponding cutback in expenditures. The prevailing sentiment is that a dollar increase in taxes, must be accompanied by a corresponding two dollar reduction in spending, for the budget to be deemed as being credible to the markets. In spite of the upcoming presentation of the budget, the real economy is showing continuing improvement, primarily driven by the pent-up demand being experienced in the automotive sector. The fact that the North American Free Trade Agreement has helped in producing two cars in Canada, for every one sold domestically, has figured prominently in the recovery. However, the current Mexican Peso crisis will undoubtedly have a major impact. This may cause the forecast growth in economic activity to drop, as foreign imported automotive products into the domestic Mexican market become prohibitively expensive. The negative real disposable income posted in the third quarter of 1994, is an indication that some of the current recovery in consumer spending has been exclusively financed by a fall in personal savings. Except for the automotive sector, many others in the services and government are in a mode of retrenchment. With wage and salary roll-backs being the present norm, the consumption component that drives economic activity can not be relied on to assist in recovery. Personal spending is expected to suffer further from the impact of the Martin budget. A positive development that places upward pressure on the dollar is the improving current account (international account) balance. Record levels of merchandise trade exported out of Canada has resulted in a reduction some $10 billion from the second to third quarters of 1994. It remains to be seen what impact the recent trade promotion trips by the prime minister will have on exports, and conversely, what negative impact the Peso crisis will have on automotive parts exports to Mexico.


Canadian Dollar Chaos
The Peso crisis has affected the dollar to the extent that investors now perceive both to be part of a “soft currency” club. The budget is expected to sever this relationship, and once again inject credibility to the currency. Consequently, the dollar will recover to trade within the 0.72 to 0.75 cent range, shortly after the presentation of the budget. A sustained rally will be dependent upon how quickly the domestic economy can restructure, to provide for sustained growth under austerity.

Economic Indicators
Current Acct. Balance Percentage of GDP Real Disposable Income Profits Before Taxes Unit Labour Costs Unemployment Rate Prime Interest Rate

26.5 -3.8 1.0 -1.9 1.8 11.3 7.48

1993 1994:Q1 1994:Q2 1994:Q3
-30.7 -4.3 0.8 20.3 0.3 11.2 5.94 -29.8 -4.1 8.0 73.6 -1.2 11.0 5.75 -30.2 -4.1 2.1 43.4 -0.6 10.7 7.17 -20.5 -2.7 -2.3 58.4 -1.3 10.2 7.25

Source: Department of Finance


but more importantly that of the provinces.4% $ Moody’s credit rating agency places Canada on its surveillance list despite budget $ support slides for Quebec independence $ residential property prices continue downward decline $ Canadian military confronts Spanish trawlers accused of over-fishing $ rail strike incurs shortages in the automotive sector $ automotive sector expected to slow down in 1995 with business conditions rising in 1996 & 1997 $ successes in computer & industrial export markets for Canadian companies Finance Minister Paul Martin Jr.6 bn. In short. problems affecting the dollar extend to factors beyond the simple reduction of the Federal deficit. 1995 $ budget presented by Finance Minister Paul Martin Jr. It calls for historic expenditure roll-backs on programs ranging from defense to business subsidies. it has not been as positive on the up side as what many have expected. has presented a historic budget document. However.Second Quarter: March 30. 78 . Martin has delivered to investors a budget that they have been waiting for. reduction in spending over next two years is the largest in Canadian history $ long bond yield spread differences with US securities stabilise at 1. Not only must the fiscal position of the federal government be taken into consideration. although excise taxes on petroleum products have increased. received well by markets $ 13. The notable exemption has been any increase in personal income taxes. Why? For one. judging by the response in the Canadian dollar.

the problem exists more on the capital side of the international account. the current decreases in the Canadian deficit by $13. The industrial growth pattern in Canada over the recent past. In fact. the automotive parts and assembly side has provided most of the business activity. On the real side of the economy. any payments in Canadian dollars must be dumped on the foreign exchange markets and converted to the bondholders’ domestic currency of choice. with over 40 percent of Canadian debt held externally. From the point of view of economic fundamentals. although at a slower pace.6 billion over the next two year period. the problem on the international accounts has not been on the trade side. Further. a typical example of which has been the 2:1 production to sales ratio (1:1 is the minimum required by Nafta) in the Canadian automotive sector. Services have also been in a state of recovery. very much resembles that of the UK. This does not exist in the cases of Belgium and Italy. there are initial signs that small to medium sized specialty computer manufacturers are poised to play a big role in the export markets. In fact. the two major economies of Ontario and Quebec have not indicated that debt and deficit reductions are explicit goals in their agenda as yet. the amount of dividends paid out periodically. A good portion of the excess vehicles produced are being exported to the US and Mexican markets. two other industrialised countries with above average debt positions. All that it does is reduce the amount of bonds that will be offered on international debt markets over the coming two years. does not retire any of the debt stock outstanding and held by foreign investors. In that respect. with the photographic and film industries now beginning to attract attention in the capital markets.Although progress on the deficit and debt has been forthcoming by the governments of Alberta and New Brunswick. whose foreign holdings of debt merely amount to 10 percent of the entire outstanding. payments to foreigners account for most of the overall deficit. The current budget. Here. although a step in the right direction concerning the fundamentals. a balance of trade surplus has been the norm for quite some time. it remains to be seen if they can endure cyclical slowdowns as well as traditional manufacturing. but will continue to rise. Services are gaining in prominence. when factored in. while Nafta con- Canadian Dollar Chaos 79 . a very different profile from the business conditions existing only four years ago. as announced by the finance minister only reduce the growth in the stock of debt outstanding. However. Although the shift towards creative services has accelerated. Overall. will only have their rate of increase fall. however. No longer are real estate and construction-related projects the preferred destinations for finance capital.

it has become the third most important country of manufacture within the European Union. the domestic political environment remains subdued. it could be the badly needed issue for Canada to unite over. The risk of having the dollar fall below 0. Politically. as the current stock of automobiles aged 10 years near the end of their useful life. The fishing issue may very well become an issue that will unify a fragmented country. the European Union is urged on to do what it doesn’t wish. if the confrontation continues to build. However. These automobiles compose the majority under ownership at this point in time. Other than the Quebec referendum. The fact of the matter is that the current atmosphere of restraint will not overcome the need for new automobiles.70 cents US has greatly diminished. based only on the expected scrappage of automobiles over the next two years. one is produced in Canada. 80 . if Parti Quebecois leader Jacques Parizeau manages to turn the recent budget against the Federal government. much to the dismay of Spain’s representatives in Brussels. The combined effect of a budget friendly to foreign capital and a far lesser chance of Quebec separating from the rest of Canada. there exists optimism that the sector will continue its current level of business activity. as a fleet of Spanish fishing trawlers using illegal nets continue to plunder the already diminished stocks of fish. Quebec separatism seems to be a dying cause at this point in time. have once again instilled a degree of confidence in the foreign exchange and bond markets. although sentiments may very well pick up. As the Spanish fleet gets larger. Although the UK does not have a formal trade agreement with the automotive sector.G7 Books tinues to ensure that for every one automobile sold in the Canadian marketplace. President Jacques Santer has opted to publicly pursue a negotiated settlement over the issue. Already. except for the current fishing impasse on the Grand Banks of Newfoundland. the EU Spanish Minister’s action to impose Europe-wide sanctions has been dismissed by a majority of European ministers. and the confrontation escalates. and if Canadian maritime patrol boats attack the illegal fleet. Aside from the good performance in the automotive assembly and parts sectors.impose trade sanctions against Canada. The depressed regions of the Atlantic fisheries have already rallied behind the actions of the Federal government. The popularity of PrimeMinister Jean Chretien is at an all-time high.

However, the possibility of systemic market risk hangs over the dollar, as now it has attained the status of an international “soft currency”, grouped together with the likes of the Italian lira, Belgian franc and ironically, the Spanish peseta. The problem that this association exerts can be seen by the recent series of crises that has plagued the Mexican peso, and continues to do so to this day. Not only has the peso problem encouraged sales of the Canadian dollar, but has also brought down with it the once invincible US currency. With perfectly mobile international capital, what happens in Mexico City or Milan, will affect the financial markets in Toronto or Montreal. With an increasing tendency towards volatility for the remainder of the decade, especially in the European sphere, towards the Maastricht intergovernmental conference, speculation against some of currencies of the “latin core” group in the EU, should the concept of a single currency fail to progress, will exert some sort of a fall-out on global markets. The only way in which the Canadian dollar can uncouple itself from the upcoming events in the EU, would be for further reductions in the budget deficits. Not only reductions for their own sake, but reductions that go together with a powerful re-development in the private sector. One cannot occur without the other. For the time being, the Canadian dollar is comfortable in its current trading band of 0.70 to 0.74 cents to one US dollar.

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Budget Summary
• deficit set at $37.9 bn. in 1994-95 & $32.7 bn. in 1995-96 & $24.3 bn. in 1996-97 • personal income taxes will not increase • excise taxes on petroleum products to rise by 1.5 cents/litre • privatisations to continue with Petro-Canada & Canadian National Railways & the air navigation system • $560 mn. annual subsidy under Western Grain Transportation Act (Crow rate) eliminated • federal civil service to reduce 45,000 positions or 14% of workforce • provincial transfer payments reduced by $2.5 bn. in 1996-97 & by $4.5 bn. in 1997-98 • Corporate taxes rise by $1.0 billion over 2 years • special tax on banks set at $100 million • general business subsidies to be reduced by 60% over 3 years • foreign aid spending to be reduced by 21% over 3 years • defense budget cut by 14.2% by 1997 • deferment against capital gains tax eliminated after January 1, 1999 & treated as realised & subject to tax


Second Quarter: June 6, 1995
$ business activity declines by 0.1% in February 1995 $ export growth shows early signs of weakness $ Province of Ontario regional elections called for June 8, 1995 $ equity markets over-inflated due to surplus pool of capital $ Province of Ontario becomes largest non-sovereign borrower in international capital markets $ real estate sales collapse by 45% in most major urban markets from 1994 values $ stock markets continue to be severely over-valued $ upcoming recession in US to transmit to Canadian markets $ dollar recovery as uncertainty over Quebec separatism begins to fade $ manufacturing sector in continuous depression as output falls by 0.3% in February 1995
Canada is awash with investment capital that cannot seem to find a proper home. As large players increasingly pull out of the stock market, small mutual fund investors continually pick up the shares at grossly over-inflated prices. In addition, numerous investment funds are scouring the Canadian landscape to finance viable investment projects, but little up to now has surfaced, causing large scale channeling of capital into paper assets in the stock and bond markets. The evidence is everywhere, as Provincial government bond premiums have narrowed considerably. A symptom of capital that is restricted to the geographical confines of what investors term as “Canadian” investment. In short, indebted Provinces benefit from this captive capital.


G7 Books

The fact that such a surplus of cash hangs over paper assets usually traded in very “thin” markets, is an unfortunate consequence of a chronic long-term disease affecting Canada. As innovation and a manufacturing base was allowed to slip deliberately over the past decade, and as property development has come to a resounding halt, perhaps never to recover again, a very serious situation confronts the policy makers of the day. How can policy effectively re-channel resources into viable projects that are not in the traditional property development, resource extraction and automotive parts manufacturing industries? Up to this moment, the good performance of the automotive parts and assembly industries has saved Canada. Admittedly, it has been generated solely on pent-up demand conditions, the most basic way that an economy can progress, but nonetheless, is the only thing that is happening at this point in time business-wise. The unfortunate situation that presently exists, where too much money is continuously chasing too few ideas, is a deep-rooted problem of the Canadian business and cultural establishments, which are most important issues that require a great deal of thought, and which are central to the current imbalance experienced in Canadian financial markets. Most major business activity remains depressed. As manufacturing continues to slide and as early signs of an impending downturn become visible in the automotive sector, real estate equity values edge on the negative. The slide in residential property values over the last four years, and with the current drop of some 50 percent over the spring-time sales in 1994, have instilled a feeling of general panic. As personal equity positions of individuals continue to erode with every fall in housing values, retail activity is directly affected, further depressing business conditions. As recession once again grips Canada’s major market; the US, it will not be long until reduced business activity from the US will be directly transmitted to Canada. This, when the pent-up activity up to now has fallen far short of most people’s expectations of what a normal level of recovery ought to be. Certainly, by having experienced inactive policy over the past four year period, unemployment and business conditions have both suffered. Unfortunately, the upcoming recession will tend to harm the presently devalued asset positions of Canadians even more. When the recession arrives, the lower level of business activity will reveal severely devalued real-estate assets, and what is more dangerous, pressure on the security held by the banking system. The immediate danger of banks lending money on only property, and not on good ideas that may generate cash-flow is fully indicative of the conservative financial institutions that currently operate in Canada. Not only have the


leading to further practices of conservative lending to compensate for the initial default. assembly and communications industries. This Canadian Dollar Chaos 85 . the jury is still out on whether these can be categorised as “good business. as is currently happening. The question at this point in time. Although there has been initial signs of a push towards the “new” economy industries. Over the past four years. Whether it causes any back-tracking remains to be seen.underwriting policies of these banks held back creativity and innovation. there develops a severe mismatch between what depositors are owed. This transformation has been a common experience. and is the underlying long-term cause of dollar weakness. Provincial borrowing patterns have contributed to Canada’s position as a debtor country. It has become a very well known fact that the Province of Ontario has become a valued customer in the Euromarkets. may cause the level of austerity in the Canadian economy to be unbearable throughout the downturn. Something must be developed in order to supplement the importance of the automotive parts and assembly factories. A situation all too familiar. is whether or not this can be reversed? In an era where the importance of raw materials and the extraction industries has been steadily eroded in significance. the prospect of recession transmitted from the US.” Or if the other members of the G-7 industrialised economies. will however. and what liquidity the financial institution may salvage from the depressed property asset held as security. The Provincial election in Ontario (largest Province) is expected to reign in a new political party. and add value to the dollar immediately. In turn. also consider the new electronics industries as something that is desired? Three months after the presentation of Paul Martin Jr. with countries such as the US and UK. will cause the financial institution to withhold the asset from the depressed marketplace. such as various forms of computer electronics. one that will be alot friendlier to business than the current New Democratic Party has proved to be over the past four years. The positive political fall-out that the election in Ontario is expected to bring. The ultimate result is an erosion of the capital base. be offset to a great degree by the impending downturn. but lending practices that take assets as security such as property. but one that stifles the development of badly-needed innovation in Canada. it will be most difficult for a country to sustain good business based only on the automotive sector. This should put an end to the re-patriation of foreign investment capital. are in the current deflationary climate left exposed. For instance. a default on a loan that is backed by greatly devalued property.’s austere budget.

investors can come to expect the Canadian dollar strengthening vis-à-vis the US dollar only marginally. The signals are in place for the stock markets to experience a correction. Since longer term capital flows have had direct effects on currency values most recently among the industrialised countries. the positive political fall-out may push the currency up to a range of 0. Under this scenario. the Canadian dollar will dip back to a trading range of 0. 86 .69 to 0. Which effect will dominate? Under present circumstances. and of a greater duration than what is experienced in the US. The argument that a soft-landing will encourage independent central banks not to raise interest rates. will in turn maintain stocks and bond values within the current trading range. also believed to be presently applicable to the US economy.78 cents US will be difficult to sustain.72 to 0. used to justify the stability of most stock market indices is one that argues in favour of the “soft-landing” hypothesis.76. This will be countered by the recessionary fall-out. The defeat of the Socialists in one of the most economically important Provinces in CanadaOntario. the upcoming dollar value will be primarily determined from two offsetting effects.72 cents US. After all is said.G7 Books will have even greater negative effects. As the results of the Ontario election are reported. which will inevitably lead to a much-reduced official bank rate over the short-term. Likewise. a level near 0. Should the recession be of a greater intensity. should it be pre-dated by some form of financial crisis and fall-out in the equity and bond markets. equity markets justifiably increase. an exchange rate that exceeds 0. The current conventional wisdom. Pent-up demand can only go so far in adding value to stocks. It may be true that interest rates will not cause a flight out of stocks and bonds.74 cents US for one Canadian dollar. deems Canadian industry uncompetitive in US export markets. but what may do more damage is the further erosion of profitability in the industrial sector. should reverse the flows of foreign profits. or hold on to existing value.78 cents US to one Canadian dollar. and not produce a flight of capital to moneymarket instruments.74 to 0. the longer-term trend of Canada becoming a debtor nation mitigates any permanent rise in the dollar over the medium-term. With the current trading range of 0.

FT 87 .Provincial Debt Positions • British Columbia • Saskatchewan • Manitoba • Newfoundland • Prince Edward Island • New Brunswick Provinces With Large Imbalances • Ontario • Québec Capital Flows Canadian Dollar Chaos Provinces Tabling Balanced Budgets For 1996 Suppliers Japan Switzerland Taiwan Netherlands Germany Hong Kong Belgium China Other (%) 53 8 6 6 5 5 4 2 11 Users US UK Canada Mexico Saudi Arabia Spain Italy Australia Other (%) 27 9 8 6 6 5 5 5 30 Source: IMF.

excess supplies of credit and negative economic growth.9 billion initially.000 inhabitants relying on some form of welfare transfer payment from the 88 . the Ontario Conservatives have reduced program spending by some $1. with some $6. Specifically.0 billion still expected to be cut from business activity in a planned mini-budget that will be detailed in October of 1995.Third Quarter: July 26. The shift towards a more investor-friendly climate in Canada’s largest province should set a trendline for the entire country over the remainder of the decade. With some 500. 1995 $ Ontario Conservative leader Michael Harris tables far-reaching spending cutbacks $ austerity measures introduced across most Canadian provinces save Québec $ spending reductions in Ontario to be matched by a 30 percent reduction in provincial income tax rates $ stronger dollar presents opportunity to Bank of Canada to lower short term rates $ automotive retail sales slide into recession while production maintains pace $ Bank of Canada draws down gold reserves in favour of the US dollar $ reductions in government transfers in Ontario shifts burden on business to create employment $ housing sales continue to stagnate at levels not seen for over a decade $ GDP falls by 2% in second quarter of 1995 $ sentiment over dollar reverts back to the spread offered over comparable risk-weighted US securities Under a climate of over-valued stock markets. newly-elected Ontario Premier Michael Harris tabled a “back to basics” economic statement after only four weeks in office.

must be the existence of a robust domestic economy that shows high potential for expansion and sustained levels of good business activity. However. as equally as troubling as the reductions in social expenditures. the contrast between the US and Canada may end out to be the most worrying aspect. road and infrastructure spending. All depends on how quick Ontario-based business sectors respond to the incentive-based programs that the Harris government is offering. Altogether a very dangerous set of aggregate circumstances for Ontario-based businesses. However. will be offset to any great extent by the “presumably” favourable investment climate created by the Harris budget? It has been argued that the costly social infrastructure in Ontario. back to their parent companies that were resident in another country. it has most vigorously been advocated by the right-wing revolution in the United States led by Congressional Representative Newt Gingrich. is whether the loss of purchasing power generated by the budget and on-going recession. Although from an accounting perspective.provincial government. they nonetheless. is the effect on small and medium sized businesses that reductions in various capital spending programs on rapid transit. However. has caused many businesses that traditionally re-invested their profits to re-patriate the surplus earned. Although it is far too early to judge what effects on purchasing power and business conditions budgetary cutbacks can be directly accountable for. The question at this point in time. provide a good deal of spin-off income that helps sustain the small and medium sized business sector. Consequently. Not only has the current philosophy over the role of government began to grip most Canadian levels of government. Certainly. a move to import the current “revolution” in government from the US. some $71 million in business grants and guarantees will hit the very vulnerable sectors of the economy that have been historically marginally profitable. out of a total population of some 7.5 million in Ontario. any move to withdraw purchasing power through restricting spending. despite the promise of a 30 percent reduction in personal income tax rates later in the year. deficits may be bad and immoral. the Ontario economy has historically had far greater inclination to rely on centralised purchasing power. This was a common pattern during the tenure of the previous socialist government of Bob Rae. In addition. Canadian Dollar Chaos 89 . will bring into doubt the possibility for profitable investment opportunity. a precondition for a return to business investment in Ontario. In the case of the US. government has never fully taken on a role as the main generator of business activity. may see a large divergence in the growth of business activity between the two countries. the announced reduction of 21.6 percent will spin-off and reduce the general level of business activity in the provincial economy. will all have on the overall economy.

In many respects. a repeal of restrictive social legislation can only result in positive investment effects over a longer period of time. In that case. Consumer spending will benefit business conditions. Regardless of the offsetting effects in the upcoming policy debates. a situation not unique only to Canada. With two of the most vital sectors to the Ontario economy showing signs of stagnation. one thing that will clearly be evident. At the front end of the beneficiaries of the tax cuts. the coming year should provide yet another opportunity to test how well a derivative of the Reagan inspired supply-side economics can 90 . The timing of further increases in stock prices will all depend on the speed at which the promised reductions in income taxes will become legislation. is the harmful effects that the new policies in Ontario will have on low income earners. while the export markets will continue to act as “safety-valves” in generating the badly needed purchasing power in the Canadian economy. they will also depend on the improving state of domestic business conditions. Already burdened by the great loss of wealth caused by the bursting of the 1980s property bubble. thereby resulting in a harmful reduction in the trade surplus adding downward pressure on the dollar. With a good deal of pension and institutional money withdrawing from equities. Deregulation without adequate demand for the goods and services produced. it will not add much to overall consumer confidence. should the promised 30 percent reduction in income taxes become law. any correction in the grossly over-valued stock markets will ensure that a continuous relapse at the retail level will persist over the next quarter. since many well-named boutiques still breach the thin line of bankruptcy by the hour. However. Should a general reduction in tax rates only affect one small segment of the population. the oversupply of credit is continuously being channeled into the stock markets. will be luxury imports ranging from automobiles to jewellery and vacations. as of this moment. knowing only the negative impact of spending cuts. and only until this is achieved can the Harris government claim any degree of success. It is hoped that such a tax cut will revive the terminally depressed high-end retail sector. Only well-rounded tax-incentive based measures will ensure a level playing field. consumer spending is bound to get worse. entering at the tail end of the bull market. It is vital that the newly-elected government not alienate the lower income segment of the population. For the next quarter. the support levels have recently been sustained on the backs of small retail investors.G7 Books The real-estate market still has not bottomed out. will not provide for the full effects that the policy originally intended. both consumer and business spending will continue to be depressed. Although business investment flows into the province are front and centre to the current cutbacks. while the automotive sector at the retail level is beginning to show visible signs of weakness.

then spending increases as in the case of Reagan’s military build-up. Canadian Dollar Chaos 91 . If it is the case that the business community does not take up the challenge presented. For In general. A general respite from the turmoil in international currency markets benefitted the Canadian dollar. not result in a rejuvenation of purchasing power in Ontario and only benefit a selective few luxury importers.74 US cents. On a comparative basis. nonetheless.73 to 0.76 US cents range. the dollar firmed to a point where it was trading at 0. present an ideal comparative framework. it would not take much positive news to raise investor euphoria. the firmer dollar allowed the Bank of Canada to lower its short-term administered rates. will ensure that the dollar will trade within the 0. Likewise. the continual easing in US short term rates. and the way in which business investment behaves both domestically and from foreign investors will be closely watched over the next several quarters. any recovery in consumer spending from the current depressed state that its in. The way in which a depressed consumer sector responds to the Harris budget in Ontario. or if the tax cuts favour only a select few luxury importers. then a consensus will quickly build towards the importance of spending. Although highly unlikely at this point in time. Although no visible effects from the budget will result over the immediate quarter. it still may give investors an excuse to dump Canadian paper in the upcoming quarter. will be considered as the more vital policy element by default. Although the presentation of the cost cutting measures in Ontario had no immediately noticeable effects in Canadian financial markets. since the business community generally applauded the initiative. The wild-card on the horizon is still the referendum planned on Quebec’s separation from Canada in September. the emergence of positive signs in private investment initiatives by industry. that may once again create the all-important purchasing power needed to power business opportunities. should place Canadian investment paper in a desirable position with foreign investors. will also support the Canadian currency at higher levels. From a frenzy of pressures in the early part of 1995. It does. any signs of further deterioration in purchasing power and domestic growth rates will put investors on alert. The latter of which is excluded from the Harris budget and more or less a function of a completely different geo-political era. the original Reaganomics of the 1980s consisted of two elements: a reduction in taxes and the unprecedented spending on militaryindustrial projects. feeding into the entire banking system. Should the tax cuts in the Harris budget. Despite the fact that the fundamentals were further weakening.

G7 Books 1995-96 Spending Reductions in Ontario $millions Program Spending Cuts Operating: Capital: Ministry Spending Reductions Operating: Capital: Public Debt Interest Savings Total Spending Reductions 850 307 500 187 40 1.884 92 .

1995? From an international investors perspective. Unfortunately. within the scope of the bill respecting the future of Québec and of the agreement signed on June 12. such a question could only be understood by the staunchest of Québec separatists. 1995?”. 1995 $ Province of Québec calls for referendum to be held on separation on October 30. and the likelihood that Québeckers will be able to set a firm foundation for their destiny by voting “yes” or “no” to the following question: “Do you agree that Quebec should become sovereign. 93 .Third Quarter: September 24. after having made a formal offer to Canada for a new economic and political partnership. 1995 $ budget austerity adopted by provinces leads to a recovery in foreign investor confidence $ Canadian chartered banks report record profits for the third quarter of 1995 $ consolidation continues to affect insurance sector as Manulife Financial & North American Life merge $ slight recovery detected in new homes market for second quarter $ paper industry plans $4 billion investment in new plant & equipment $ capacity utilisation falls in most sectors with the exception of paper manufacturers $ stock markets continue to rise on expectations of low inflation $ dollar recovers relative to most G-7 currencies $ US investors perceive Canada as not meeting her economic potential All eyes have focused on the Québec referendum campaign. its aftermath. What bill respecting the future of Québec? What agreement signed on June 12.

the European Union is an economic area that attempts to tie numerous “culturally diverse” countries economically. When Réné Lévesque led the campaign in 1980. Luxembourg and the Netherlands viewed some form of co-ordination in economic and commercial policies essential for stability and prosperity. Sweden and Finland. The return of Jacques Parizeau and the Parti Québecois. once again asserted a timetable for the ultimate vote. as most corporations shifted their headquarters to Toronto. but the economic costs were very high. The future addition of the UK. political leaders and the electorate of France. Perhaps this time around they should. provide for informative case studies. In the opinion of many diverse 94 . Viewed in relative terms. The Treaty of Rome in 1957 established a framework that would create similar conditions for the conduct of business over a grouping of culturally diverse countries. Belgium. Austria.G7 Books Canadian internal political affairs do not normally attract too much attention among international investors. Spain. The benefits of sharing a common external tariff. The degree to which member states consider being part of the EU essential. If the current referendum campaign is placed in a historical perspective. one may be able to argue that the separatist tendency of Québec follows a cyclical pattern. parallels between Canada and the program for a single currency that is currently on the receiving end of large doses of political capital among the European community. in response to the political uncertainties created. standardisation in cross-border commerce. were all functions that could best benefit a close economic area through some type of central control mechanism. there may also exist an economic argument for provinces to become separate. a common agricultural policy and a central mechanism to monitor monopolistic takeovers and mergers. At that point in time. the concept of separation continued to be an abstract ideal that was best left to some future decade. Swept up in a lengthy period of economic expansion. Portugal. Germany. Québec did not separate in 1980. will vary according to the policy in question. Italy. The prosperity of the booming 1980s discouraged any moves to even consider separating from Canada. For this. Ireland. the argument in support of separation was based on the traditional historical resentment that Québeckers had over English Canada’s domination over cultural issues. Although there has always been historical constitutional tension between the Federal government of Canada and Québec. also represented culturally-diverse states that deemed it beneficial for one reason or another to join the EU. Denmark and most recently.

causing vast standard of living differences among provinces. Deliberate devaluations act to stimulate the export sector and to import goods at higher prices. southern Italy and the UK are recipients of regional development transfers. Ironically. Both Italy and the UK have benefitted their respective industrial sectors by being dumped out of the fixed exchange rate mechanism in 1992. but have reiterated their preference for the continued use of the Canadian dollar. Québec’s introduction of its own currency would create stimulus within the province. By tying 15 European countries under one currency. Jacques Parizeau and the Parti Québecois have rejected the benefits accruing from their own currency. This has been exacerbated in the slow growth and unstable 1990s. regional development transfers have dried up. Canada is a very large economic space composed of twelve diverse provinces.European politicians. adding to domestic inflation. On economic grounds. Likewise. Under such a regime. As with the European Union. the Parizeau plan comes up far short of what is required to stim- Canadian Dollar Chaos 95 . the economic reasons are even more compelling. In addition. Under a period of slow growth. A currency can at times be viewed as a substitute to fiscal policy. which will only escalate under a single currency. at least. Clearly. all provinces have benefitted from co-ordinating various expenditures in a central government. vast differences in regional economic and industrial development existed among the provinces. Although very difficult. States like Spain. provided no hostility and bad feelings would arise from the rest of the country. such a policy can only be effective under certain conditions. or the separatist that looks forward to an independent Québec for economic reasons to reject separation. Aside from the usual cries over the loss of sovereignty in countries such as the UK and Denmark. it is also true that “surprise” devaluations work the best in stimulating the domestic sector. A stance that may lead the marginal separatist. time has come to re-examine the argument that favours an independent province of Québec. Portugal. one being that a country’s economy is sufficiently large and that any attempts at devaluation be co-ordinated among major trading partners. the same problem will surface in Europe. the current program that will take the economic area under a single currency will not be effective over the longer term. Devaluations also tend to work well under deflationary situations where business conditions tend to be depressed for a very lengthy period of time. as it has in Canada. They have also all been a part of an enduring currency union tied under a single money called the “dollar”. Moreover. The European Union in its experiment of a single currency need look no further than at the Canadian situation for guidance.

Although only the impulsive will shift short term funds out of Canadian dollar denominated financial products. Already.G7 Books ulate the prolonged recession. the dollar is continuing to attract positive sentiments in the markets. Despite the vote in Québec. next to growing instability in Japan and various parts of Europe. The dollar will continue to hold its ground within the 0. the attempted separation in Québec is not expected to be successful. it may be too late for the Parizeau government to realise that the majority of Québeckers intend to vote on a sound economic agenda.77 US cents range over the next quarter. with recent austerity programs adopted by various provincial governments that will reduce large debt levels. US investors have voiced their impatience over yet another political upheaval in Canada. Political jitters before and after the vote in Québec will cap the progress of the dollar. Central to which is the introduction of their own currency. Fortunately for Canada. despite such efforts. the dollar is a recipient of positive natural sentiments emanating from investors that view it as the best alternative.72 to 0. However. judging by the risk premia on offer in the bond markets. 96 . investors are taking the referendum vote as a foregone conclusion.

1995 $ Québec referendum results show narrow Federalist victory $ leader of separatist Parti Québecois Jacques Parizeau tenders resignation $ leader of separatist campaign Lucien Bouchard favoured to assume role of Québec premier $ dollar trades within narrow range as Québec government intervenes to support a floor $ Prime-Minister Jean Chrétien attacked for pursuing an indifferent campaign in favour of unity $ investors fear shift in political agenda away from real economic & competitiveness issues $ decision in favour of unity prompts surge in dollar & fall in official discount rate shortly after referendum $ Progressive Conservative leader Jean Charest emerges as spokesman for the Federalists $ economic conditions deteriorate as raw material prices weaken on world markets $ early evidence of slowdown in retail sales as consumer debt reaches record levels Despite the victory for the Federal side in the Québec referendum on sovereignty. rather than on any resurgence of political uncertainty. is made more on the basis of what the government is choosing to retreat from on the spending side. Their choice to leave behind an increasingly fragmented and regionalised country. what is preoccupying the minds of most members in the business community is the negative impact that cutbacks in spending have produced in Ontario. the Canadian political architecture is more deeply in doubt now than in any time since confederation. However. Premier Mike Harris’ strict insistence on balancing the 97 . True. entrepreneurs have been leading an exodus out of the country.Fourth Quarter: November 25.

has always had a large level of participation from all levels of government. The new climate of minimalist government involvement in business and economic affairs is consistent with the broader trend in most industrialised countries. have combined to depress overall economic conditions for the immediate fiscal quarter. paired off with as many projects to finance. old ideas fight to survive. is preparing to mothball existing operations and shift its remaining cash-flow out of the country. and replacing an outdated group of business. and Canadian economic development in general.G7 Books budget and retreating from the economy on many fronts. has been that a political balkanization is now taking shape. government and social leaders. and sever its links to the global trend of seeking out ever more greater efficiencies. and becoming more outward-looking. is one where national government control is directly proportional to the increasing technological changes that have occurred since the beginning of the decade. Instead of reaching out. is asking too much from those traditionally dependent on the procurement process. with business people supported for the most part by government money (for which there are numerous such persons in Canada) turned away in droves from the harsh realities of free markets. To succeed under a regime of freer markets. was in the classical sense. if not well into the early quarters of 1996. Whether or not a country such as Canada can go it alone. supposed to have incited a stampede of new investment dollars. Evidence of the great investment retreat comes from sectors that have been the traditional beneficiaries of government contracts. The double effect of first the political doubts surfacing from the Québec referendum. coupled by the revelation of the true colours of those in the business community now fleeing. and any other industrial or service sector that has grown through the traditional procurement process. Instead of following the global trend towards free-trade. Unfortunately. than what is assumed by the existing political leadership. those wielding stale political solutions in the post-1995 referendum era are down to their last chips. The fact of the matter is that the glorious decades of economic growth in Canada. hence the short term exodus. and relying ever more on a self-regulating market. Just as the old procurement-dependent practitioners in the business community have decided to withdraw. The irony of the modern age from a Canadian perspective. It has instead produced the opposite. the depressing impact on regional Ontario and Québec business conditions will further deepen the economic distress caused by technological re-structuring. The construction sector in particular. Canadian society remains very insular. Evidence from the immediate aftermath of the Québec referendum shows that separation will continue to resurface at a far quicker and regular pace. 98 .

As matters presently stand.4 percent margin. and to the longer term committed investment capital in the Canadian economy. only to initiate a lengthy period of price reductions that will likely begin to affect margins very early in the cycle. The mere prospect of such a coupling would solicit howls of protest from the Federal establishment. is now more commonly associated with a term of 60 to 90 days for repayment. with no real prospects of a turnaround in sight. which will ensure that a climate of uncertainty prevails well into the early years of the twenty-first century. and most importantly. as the familiar net 30 day term. to take over the leadership of the provincial Parti Québecois. Steel. should Bouchard assume the leadership of the Parti Québecois. and would certainly cause long term committed investors to question their roles in the Canadian economy in a serious manner. when the referendum was still deemed to be a “non-issue”. the manufacturing boom of 1994 is now coming to an end. After sustaining a comfortable margin of 59 to 41 percent in favour of the Federalists throughout the early months of summer past. In the immediate cyclical economy. debt repayments are showing signs of liquidity strain. there is a very good chance that Lucien Bouchard will resign as leader of the Federalist Bloc Québecois separatists. With the likely negative impact on investment plans affecting the rate of unemployment. if at all. Housing prices have reached depression status. a very unattractive prospect to committed free-market business people. a scenario that would likely occur. as the leader of the Federalists in the 1995 referendum. It is safe to say. just as it is in France and the UK. has come under severe attack. What seemed as an insurmountable lead for the Federalists. is now very visible. Personal finances are deteriorating even further. ended up as a 50. that for the most part. it quickly became a crisis after the entry of Bloc Québecois leader Lucien Bouchard. would result in a referendum linked to a provincial election victory. paper prices have reached their elixir. business conditions point to an ending in the growth experienced from the revival of pent-up demand in 1994. In addition. The fall in commodity prices that has engulfed the manufacturing sectors in the second quarter. left to be recycled once again in the steeply over-valued Canadian stock markets. Canadian Dollar Chaos 99 . as the prospect for another referendum on separation could become linked to a renewed mandate for the Parti Québecois under the leadership of Bouchard. In all. After the quick resignation of Parti Québecois leader Jacques Parizeau.6 to 49. Such a development would only lead to further instability. The remainder of the decade is likely to rattle the remnants of the traditional Canadian political architecture. This. despite the fact that Canadian financial institutions are currently awash with investment capital. as negative equity has become a familiar phenomenon.The performance of Jean Chrétien.

725 to 0. Afall-out over the rhetoric connected to the North American Free Trade Agreement (Nafta) in the context of a growing trade deficit with Mexico. coupled with the overhang of political uncertainty. save residential mortgages.G7 Books The problems that are being witnessed on the personal financial side. Evidence of a 0. investors would be advised to pay more attention than usual to developments in banking. Despite the fact that lending has become an activity in decline. and with a general climate of a slow-down in growth.75 cent level. This may become a very hot issue.74 US cents. fee-driven services will serve to offset any problems that may arise from the continuing property shake-out. 100 . the traditional Canadian export markets south of the border will contract well into 1996. then a level above 0. The narrow victory. Before any form of banking panic ensues.65 cent dollar surfaced in US border towns. even among traditional business partners. should the Mexican peso come under continuous pressure. must come into question. however. In all. On fundamental grounds. It is no secret that the global ranking of Canadian banks in terms of asset volume has dropped by 50 percent. Canadian financial institutions have chosen to slowly retreat from the active lending market. can only call into question the quality of the assets of most Canadian banks and financial institutions. should problems surface in Europe over the single currency project (always a risk). as panic-stricken Canadian citizens moved to convert their savings into US funds. despite massive intervention by Québec’s powerful pension fund. However. conditions in the traditional US export market will act to further depress domestic business conditions. However. At the height of referendum jitters. we must remember that fee-driven activity is coming to play a very important role in Canadian banking. With the US government on the verge of defaulting on its interest payments. the dollar should not move too far above the 0. as cheap imports pour into the US. Given that the five chartered banks have virtually retreated into being primarily domestic savings and mortgage banks. For a variety of reasons. the underlying quality of secured residential properties for which most mortgages are based on. eliminated the risk premium and the immediate panic from the referendum.75 cents is likely. or should more political fall-out afflict the US budget. and a rise in trade friction is bound to surface. will generate some fall-out with their trade relationship with Canada. the Canadian dollar maintained its value within a narrow range of 0. to offset some of the short-term outflows. A category for which they are bound to pay very dearly in the coming years. Add the presidential election campaign.

" 101 . as one of the most important periods for retail sales fell flat. 1996 $ OECD warns over heavy debt burden and suggests that large public sector debts prevented gains from low inflation $ economic activity heavily dependent on investment in export-intensive sectors $ substantial gap still exists between actual and potential production output $ federal Finance Minister Paul Martin Jr. Leading up to what has become termed as "the worst Christmas in a non-recession year" were record high personal debts. the Qu6bec referendum on sovereignty and evidence throughout 1995 that went against the official views that "recovery had taken hold.First Quarter: January. proposes further budget cuts prior to 1996 budget address $ Lucien Bouchard becomes premier of Quebec while investors expect early provincial elections $ Ontario Premier Michael Harris’ plan to reduce spending raises prospects of widespread user fee charges $ Federal government system of transfer payments in doubt as reallocation of Ontario budget likely $ retailers face prospect of 1995 being the worst Christmas season in a non-recession year $ large domestic Canadian banks report record profit performances based on retail service charges $ venture capital industry under attack for investing mostly in safe and secure treasury bills Business Outlook The year 1995 ended in an anticlimax.

the small and medium sized companies and recent start-ups that have been around for a period of less than two years. they are mirror reflections of the depressed state of domestic business activity. Prague. and have committed themselves to raising funds through such things as commercial paper and stock issues. it was the continuing search by talented new technological small and medium sized companies worldwide. does not at all mean that things are going well within industry. which has just been able to register record levels of earnings. Financial research has commonly established the view that what happens on the Dow in New York. the record breaking market in Toronto has captured the peculiar behaviour of the Canadian banking system. Brussels. large amounts of money are allocated to companies that really do not need the financing. or those companies that have the highest propensity to create growth and deliver employment opportunities. by behaving most unlike the way in which bankers ought to behave. In Canada. lending activity is virtually absent in the sectors that generate most of the dynamic growth. most business investment was made in those sectors that were mainly oriented towards the export markets. in actuality. the events above may be deemed as being positive newsworthy items. with a large propensity to take as little risk as possible. it must have been the record breaking run that the Toronto Stock Exchange registered. In the case of record breaking stock exchange indices worldwide. Consequently. and especially in the small and medium sized business sectors. credit decisions are usually made on the basis of the size of the recipient. Herein lies what is termed as the "Canadian Growth Trap". if followed in its entirety to its final conclusion. On the surface. compete with a flood of capital that is readily available. however. On the real side of the productive economy. Most Canadian bankers are domestic in orientation. What is more. than they have on any occasions in the recent past. Paris. indicates the high level of correlation that exists in global financial markets. Just because the Toronto Stock Exchange is continually pointing to record high activity. An initial impetus that the New York Stock Exchange is able to deliver to world markets. As such. but only to a select grouping of multinational organisations and governments.G7 Books If one was forced to proclaim that something positive occurred in the Canadian economy in 1995. 102 . for interested buyers that would match their enthusiasm for their products. stock markets even more remotely mirror any real economic fundamentals within individual countries themselves. Very often. Credit decisions that are made on the basis of size. Instead. as the process of credit intermediation bypasses the small and medium sized sector. The dynamic of the Canadian banking system is a very interesting one. Zagreb and Toronto. will also happen in Luxembourg.

but have primarily cash-flow and receivables to offer as assets. are commonly placed in savings deposits with the banking system. it was revealed that the last hope for the financing of innovative small and medium sized export companies." In essence. hospitals and entitlement programs such as pensions and welfare. this must change. A government raises money by issuing savings bonds or treasury bills. if there is any hope at all for better business and employment conditions in Canada. public sector workers are risk-averse. and the money transfers that are not spent on the necessities of every day life. public corporations and the various levels of govemment themself." Instead of having the massive capital of the labour-sponsored funds go into dynamic job producing companies. Spending occurs to finance the public service and outlays are advanced to various public institutions such as universities. In a period of government spending cutbacks. More specifically. By their very nature. the labour.The intermediation process that has become most identifiable with the large domestic banks in Canada. the private sector must have the means by which it can assume the role of the previous public entities. while some money is channeled to small and medium sized companies that service only those necessities of everyday life. This circular process continues to spiral around. laundromats and garages. must become "financeable" entities by the Canadian banking sector. In essence. that were supposed to have been reserved for growing the dynamic small company sector. have instead been invested in such things as treasury bills and even “risk-free” stocks. it is becoming a well-known fact that 75 percent of these labour. With the retreat of the public sector. the Canadian banking system re-shuffles deposits to those very same institutional organisations that have raised money at the outset: hydro utilities.sponsored venture capital funds. Canadian Dollar Chaos 103 . the intermediation spiral has enticed the very organisations that were supposed to have been created to assist the small and medium sector. In turn. that capital be channeled to dynamic growth industries. not able to be active participants in the spiral of capital themselves. invariably such things as grocery shops. runs along the following lines. It is now more vital than ever. Although very profitable at this moment. it was revealed that they were all caught up in the game for searching for the "big deal.sponsored venture capital funds were trying to play the role that the domestic Canadian bankers currently perform. was also caught up in this "Canadian Growth Trap. Companies that have endured over a period of fifteen to eighteen months of operation. the entire banking system in Canada has become a burden in achieving the required level of business activity and income growth. Recently.

0 million residents of Ontario will continually lack confidence to commit to the purchase of big ticket items. will have a positive effect on the dollar. but remote provinces such as Newfoundland and Saskatchewan. An orderly reduction in the public sector in Canada. that has made a commitment to leading the general trend towards less public involvement in its economy. Evidence is everywhere. will further benefit the dollar. The withdrawal of spending such a great extent may further erode the ability of the Federal government to manage regional disparity througout the country. 104 .G7 Books In 1996. The danger is that the recent display of restraint during the Christmas shopping period. Continuous cutbacks in the public service. a general retreat in the public sectors of Canada will that were supposed to have been reserved ensure a completely different composition for growing the dynamic small company of the economy. the spending cuts announced in the economic statement of November 1995. What is more. are expected to be followed up by even more cuts in the upcoming budget. Currency Forecast The seriousness under which all levels of government have displayed will to balance budgets. As an overall reduction of transfer payments from the most prosperous province of Ontario. Moreover. Small retailers will find it increasingly difficult to continue to trade. that the effectiveness of the Federal government is continuously being eroded. will serve to depress any hopes that consumer spending will lead a durable recovery. will ensure that some 3. In all. is expected to impact retail distribution throughout Canada. will agitate further divisions in national unity. may continue well into 1996. will become increasingly regionalised and unable to relate to the central powers which bind the entire country together. Investors will take note that Canada is a willing participant within the G-7 group of industrialised countries. countered by turmoil in France and Germany. Not only will Qu6bec deliver yet another round of voting for separation. while large discount stores from the United States will continue to expand their presence within the Canadian market. Severe structural changes in the Canadian economy. the cutbacks announced by the Ontario provincial government of Michael Harris are expected to filter through the economy. a retail sector shake-out. the second time in five years.

encouraged through spending cutbacks in Ontario and most western provinces. all create a dangerously unstable environment.Second Quarter: April. 105 . 1996 • Ontario plans to cut back civil service erupts in labour action • record number of bankruptcies recorded in January 1996 • residential property prices continue to slide as bankoffered mortgages fall to historic lows • 1996 federal budget delivers spending cuts and no additional tax increases • defense sector scaled down even further as budget cut back by $600 million • incentives for labour-sponsored venture capital corporations reduced • federal budget to be balanced by 2000 at the current pace of program cutbacks • mergers & acquisitions activity in 1996 is expected to surpass the levels of 1995 • a dormant mortgage market and a surplus of capital prompts Canadian banks to reconsider leveraged buyouts • slowdown in US market encourages Canadian companies to search for alternative markets Business Outlook Business sentiment has experienced a reversal of fortune as a record number of bankruptcies were registered in January of the new year. together with the federal government's goal of balancing the budget by the year 2000. The deflationary environment in most regions.

A tight fiscal stance by both the federal and provincial governments. The environment on most Canadian university campuses is one of high anxiety. With very few employment opportunities in the private sector. Such uncertainties have created a great deal of anxiety and displacement. federal Finance Minister Paul Martin Jr. Moreover. Specifically. has to some extent been countered by historically low interest rates on mortgages and loans charged to the best corporate customers. A hallmark of the changing environment is the effect that the computer has had on the Toronto Stock Exchange. are subtle signs of unrest and uncertainty. Recently. Canada may achieve the goal in a matter of 4 or 5 years. that only service-sector employment opportunities are what remain. the technological revolution continues to place the Canadian work environment on the vanguard of change among most of the G-7 countries. Teaching positions in both universities and secondary schools. While the business environment continues to undergo very revolutionary changes. stock equity traders have been made redundant on the floor. public cutbacks have caused a virtual collapse in the traditional professions. This has in turn depressed the housing market so much. that one can conceivably purchase a home through a common credit card. presented a document that will lead to a balanced budget by the year 2000. the dollar did not show any reaction as of yet.7 billion. along with candidates trained for medical practice and legal work are all finding the current period extremely difficult. The pace of technological change has been so revolutionary.G7 Books Behind the broader trend towards depression. has continued to set new records in step with the Dow Jones Industrial Average. Recently. Despite the presentation of such a scenario. the T o r o n t o S t o c k Exchange (TSE). he went on to present a plan to continue with the progress and hold the deficit to $17 billion or 2 percent of GDP by 1997-98. he committed his Liberal government to reducing the fiscal deficit to $24. from its current $32. while those trading futures and options await similar destinies over the next year or two. Moreover.3 billion or 3 percent of GDP by 1996-97. It is interesting to note that while the Democrats and Republicans in the US have been arguing over balancing the budget within either 7 or 10 years. and have resulted in chronically depressed levels of consumer confidence. 106 .

Ontario Hydro and several other smaller functions that could be assumed by the private sector. Consequently. Qu6bec Premier Lucien Bouchard will most likely move to reduce the provincial deficit by privatising several state-controlled assets. The traditional banking system is not showing any interest in this sector since the time and money that it takes to consummate a deal with a small player. a far higher rate of return can be achieved by doing a very large deal. The break-out of a computer price-war in the personal computer market among most of the major brand names. via the mortgage or small business loans markets. The Toronto Stock Exchange has been the recipient of capital flows driven by the concerns that it is the "only game in town" at the moment. The purchase of a new automobile. All of these trends underscore the low demand for capital financing in a low growth environment. Likewise. should the domestic political climate be right. The problem is that there just are not that many large deals in the Canadian market. is signalling a temporary saturation point for the sales of computer and high tech products in the consumer marketplace. along with subdued interest in borrowing for consumption purposes. The combination of low rates of return for savers and a lack of willingness to intermediate in the small companies sector. 107 . As with the Dow Jones.Money & Bankin Canadian Dollar Chaos A brief summary of the status of the Canadian financial system continues to reveal a large surplus of investment funds. On top of this large surplus of funds.000 is almost non-existent in Canada. The Ontario government of Michael Harris is expected to decide on the privatisations of the state-controlled liquor control board (LCBO). Meaning that only the stock market can deliver the returns far and above what are being offered from the intermediation process in the real economy. Privatisations Several foreign merchant banking presences have been established recently to advise all levels of government on selling off public assets. a situation exists where far too many financial institutions -domestic and foreign are going after the same deals. has led to the record run-up in the Toronto Stock Exchange index. is a drying up of mortgage demand for house ownership in the consumer sector. and crowding into an already overcrowded market. Financing of the small business sector with turnover of $500. or some household item also rank very low down the list.

has been the use of an all share transaction. The prospect of a balanced budget. should add even more value to the currency. financing must be in place before a bid is tendered. with new funds recently launched by specialists Kohlberg Kravis Roberts & Co. One of which was the emergence of a $2. According to Mr. whereas the US only requires a communication through a press release. Paul O'Brien. Specifically. since a targets acceptance of the shares of the bidder are dependent upon the upside potential of the stock after the acquisition has taken place. according to managing editor of Mergers & Acquisitions in Canada. and Goldman Sachs. Currency Forecast 108 . the dollar is one of the better currencies among the members of the G-7 grouping of countries on fundamental grounds. The Canadian dollar has been steady after the passage of the 1996 budget and the Qu6bec referendum in 1995. and move closer to those in 1994.7 billion bid by Belgian based Interbrew SA for Canadian brewing and entertainment group John Labatt Ltd. Mr. will be Canadian banks' willingness to once again engage themselves actively in the leveraged buyouts market (LBO). as opposed to the recent market for acquisitions in the US. Accompanying this accelerated activity. such that economies of scale are immediate. This is only common when two companies decide to merge in a specialised industry sector. LBOs are somewhat more limited in Canada. O'Brien. as LBO funds have been able to raise over $10 billion in 1994.G7 Books Mergers & Acquisitions Acquisitions activity in 1996 is expected to break the levels seen in 1995. Overall. the LBO has been available to several ver large deals in the Canadian mark e t p I a c e . this form of financing was offered by the large Teachers' Pension Fund in two transactions recently. As an additional outlet for the surplus capital that is available. What is less common in Canada. The growing use of cash in Canada may indicate that such tie-ups have been exhausted for the time being. In Canada. The preference for a combination of share and cash offerings is consistent with the small Canadian marketplace. the LBO in the US is enjoying a resurgence. In contrast to the LBO situation in the US.

if not better.Second Quarter: April 28. but steady level of growth in business conditions. Canada has continued to register a slow. 109 . In fact. is in fact. it may also be accurate to admit to the fact that the Canadian recovery may be just as good as the prevailing business climate in the US. but consistent improvement trend in business conditions in line with most members of the G-7 group of countries. directly in contrast to the worsening conditions in France and Germany. The unspectacular. 1996 $ consumer bankruptcies continue to increase as overall economy continues to depend on exports $ auto sales show slight recovery in first quarter of 1996 as production share continues to grow from transplants $ employment shows marginal increase in service industries & contraction in manufacturing & financial services $ Canada’s net foreign debt declined as did the rate of increase in 1995 individual net worth $ corporate debt to equity ratios decline as the corporate sector becomes a net lender to the Canadian economy $ consumer debt rises even though a borrowing slump takes hold $ number of jobs in the financial sector continues to decline as technology introduces new innovation $ property prices continue downward trend despite short respite as mortgage quality issue resurfaces $ Québec Premier Lucien Bouchard becomes determined to halt continued decline of the city of Montréal $ selective group of Canadian based companies participate in acquisitions activity in both US and Europe Now that the element of political risk has disappeared for the time being.

An interesting development in the automotive sector has been the increasing share of production attributed to Japanese transplants. Overall. however. The market share for vehicles manufactured at these plants has tripled since February of 1993. While on the subject of corporate export success stories.5 percent decline registered in January. mainly generated by “corporate downsizing” exceeded capital expenditures. new vehicle sales have increased by 3. the Canadian situation is remarkably similar to the prevailing conditions among businesses and consumers in France.0 percent in 1995. Indicating an overall trend towards stronger balance sheets. is currently confronted by a climate of increasing liquidity. Many instances are beginning to emerge of outward looking industries in Canada. implying that they became net lenders to the overall Canadian economy in 1995. In 1995. it is interesting to note the progress that the corporate sector as a whole has made in managing its debt structure. Many of the export-oriented brand-name companies such as Magna International and transportation equipment manufacturer Bombardier. 110 .G7 Books Although the automotive sector has been coasting on an unspectacular rate of growth for a consecutive eighth month.0 percent rate in 1994. the divergence solidly in favour of a surplus in merchandise trade has been clearly evident. no different from most other re-structuring industrialised countries. leading to the “intermediation problem” of the 1990s.4 percent in February. with unprecedented amounts of credit available. loans and bonds issued. the cash-rich corporate sector has increasingly little need to access bank-generated lines of credit. but has left itself vulnerable to the criticisms of small and medium sized businesses. Since the middle of 1993. compared with a 6. Not only has the rigid Canadian banking system come to rely on acting as an investment manager under current conditions. The slow growth climate in the domestic Canadian economy. credit market debt which includes short term paper. What is very clear. Consequently. In fact. is the receptive response in which the Canadian export industry has taken up the challenge. has shown an increasing merchandise trade surplus. have been joined by lesser known medium sized industries with a keen interest in establishing operations in other markets. grew at a rate of 4. February has shown some early signs of the continuation of an upward trend. corporate internal sources of funds. offsetting somewhat the 4. the corporate sector. In that respect. In short. that highly desire more credit at more favourable lending rates.

In the gold mining sector. but. Canadian Dollar Chaos Mergers & Acquisitions Some of the more prominent international activity. The $22. Currently. would bring immediate pressures on the margins that have been traditionally generated by the Canadian chartered banks. it is hoped.The unwillingness of Canadian chartered banks to lend to these producers of future wealth. Somehow. consumer products and automotive parts sectors. as presented in their balance sheets in Canada. Recently. Recent activity in the world gold markets and steady consumer demand in some far eastern emerging markets. Any ruling that would allow these banking operations to allow the full backing of their parent’s capital base. occurred in the precious metals. Not only would the fierce competitive climate add pressures to the overall pricing scheme. the “subsidiary” status of these global banks operating in the Canadian environment. the push by some global banks in Canada such as Hong Kong Bank. has acquired UK based Automotive Components Dunstable Ltd. Recent indications point to the fact that they have a clear preference in acting as stock brokers and investment advisers. the credit needs of the neglected small and medium-sized enterprises. NatWest Markets and Citibank. continues to generate interest in precious metals. Specifically. If not. has placed them in a very uncomfortable situation when it comes to investing their enormous deposit base. financial innovation must come about. to explore the possibility of acquiring an interest in a development. has entered into negotiations with US based Newmont Mining Corp. by which the future wealth of the country is generated. that a far better process of intermediation would be available to the credit needs of Canadian businesses. would become even more valuable by virtue of the fact that there will now be even more financial institutions chasing the too few investment outlets that have been on offer for so long. then the financial assets available over the stock markets and bond markets. Placer Dome Inc. imposed restrictions on their activities to the amount of their Canadian capital base. Automotive parts producer Devtek Corp. over being traditional bankers which provides for the foundation of future wealth.3 million Devtek common stock 111 . prompted the government to consider changing the bank act. At issue is the Indonesian based Batu Hijau gold property that is 80 percent controlled by Newmont. The problem in the intermediation process may become resolved to a certain extent.4 million purchase price will be financed through a combination of cash and a 1.

and attempts to take advantage of economies of scale in specific sectors.G7 Books exchange. In a transaction that is still subject to regulatory approval. and ConAgra Inc. The only reason that the dollar has not challenged even lower levels is that most other industrialised countries in the group of seven. and may even conduct a strategy of export replacement. respectively. the upward movement of the dollar has been limited by very weak fundamentals in the domestic economy. through its Canadian subsidiary. the study noted that the government of France controls 59 corporations in Canada in the banking and aluminum sectors. The push towards new markets will offset the exceedingly depressed conditions domestically. With a good deal of the political uncertainty in Québec gone. Of the corporations that are resident in Canada.8 percent are Canadian controlled. while 9.734 US cents over the last quarter. Overall.9 percent are US controlled and the UK and Japan control 2. Canadian corporate concentration is still led by the Edper Group owned by Edward and Peter Bronfman.0 percent. This co-incides with an abundant supply of acquisition finance for larger deals. 112 . Concentration In an interesting study conducted by Statistics Canada. The deal is an example of exceptional European opportunities for wellmanaged automotive parts producers in Canada. US based agricultural products producer Archer-Daniels Midland. some 80. Export growth will add upward pressure. plans to acquire Maple Leaf Mills Inc. are showing even weaker fundamentals. from owners Maple Leaf Food Inc.0 and 1. More and more. Currency Forecast The Canadian dollar has averaged 0. despite the passage of the North American Free Trade Agreement and a greater openness to capital flows and direct investment in the world. corporate ownership remains very concentrated. In a surprising revelation. the well-managed firms with a good deal of financial backing will prefer to look for acquisitions outside of Canada. The top 24 enterprises in Canada encompass some 2. ranking behind the governments of Canada and Québec when government ownership is at issue.574 corporations. it is expected that merger and acquisition trends will continue over the next quarter.

Consequently. The underlying trend for the remainder of the second quarter. 1996 $ unemployment rises in manufacturing and construction industries $ passenger car sales reach lowest level in more than 25 years as consumers prefer minivans & sport vehicles $ “big 3” auto sales climb as imported vehicle sales suffer $ house prices decline for the 22nd consecutive month as builders cite competitive market conditions $ raw materials price index falls by 1. is further contraction leading to an easing of the pent-up demand conditions that have fueled the US recovery in 1994 and most of 1995. and leading into the third quarter is the possibility of more sluggishness and recession. Depressed demand conditions domestically. and continue to steadily worsen from one year ago.6 % $ export based industries suffer sluggishness in their markets $ manufacturing capacities fall to 82. The evidence in Canada’s most important export market. have been joined by worsening prospects in export markets. the United States.Third Quarter: June 18.5% in May 1996 as mineral fuels drop by 8.7 % from a peak of 86.0 % reached in the first quarter of 1995 $ reduction in capacity utilisation in wood industry signals large correction in paper prices $ further austerity measures enacted by the Ontario provincial government begin to hear protests from businesses $ banks continue to report record profits from stock broking and trading activities Canadian business conditions have deteriorated since the first quarter of 1996. the most significant 113 .

5 percent. recent decreases in the demand for newsprint and paper products have caused a great deal of panic in the pulp and paper sector. The reductions came in the form of the strike in US automotive brake parts. especially in Ontario and Québec.000 vehicles recorded throughout 1995. evidence of a downturn in the auto sector has surfaced. Sales in April were well below the monthly average of 97. which ultimately affected the assembly of models based in Canadian plants that were destined for the US market. Producers are expected to reduce supplies and prices in order to clear out their large inventory positions. Currently. or 82. Overall. Despite signs of a setback in domestic vehicle sales and falling exports. Canada would have a difficult time convincing anyone that there was anything resembling a manufacturing industry at all. as the growing popularity of minivans and sport utility vehicles have captured the imagination of consumers. The overall level of vehicle sales has fallen by 89. compared with 82. Canadian industries have reduced their use of production capacity for the fourth straight quarter. the fortunes of manufacturing and most industrial activity are mainly determined by the success of this industry.8 percent in the first quarter of 1996. the overall sector is expected to rebound. in favour of mini van and sport utility vehicles.833 from March 1996. as over investment over the past six quarters has created excess capacity in production. Sales in April 1996 have recorded their lowest level of sales in more than a quarter of a century. Further. Likewise. as most aging fleets of vehicles in the Canadian market will be replaced over the next several years. or by 6.9 percent in the fourth quarter of 1995. The surge in production throughout 1994 was mainly driven by pent-up demand conditions and successful exporting activity joined by record increases in business investment.2 percent decline in profits of non-financial corporations in the first quarter. Despite this upbeat scenario in the industry.G7 Books declines have been registered in the production levels of export-based firms in Canada. there are some existing disturbing signs for the overall passenger car market. The shift in tastes could have a profound impact on tooling and investment in existing passenger car plants. business has recorded a 11. 114 . For the first time in over three years. Without the Auto Pact and the two consecutive free trade agreements. Brake on New Cars It can be argued that the automotive parts and assembly sector is Canada.

representing the twenty-second consecutive month of decline. After the robust growth of single family buyers in the 1970s and 1980s. coupled with the collapse in commercial real-estate will affect other domestic lending activity in the small business sector. poor economic conditions have combined with falling numbers of first-time buyers to collapse the real estate market. after posting several landmark deals that included publishing groups Thomson acquiring US based legal on-line publisher West Publishing for $4. falling real-estate values. Such a situation in this sector has not been experienced before in recent history.5 billion offer for Diamond Fields Resources Inc. after a brief bidding war with rival Falconbridge saw the quick retirement of its management strategy. the rate of decline in house prices has been gathering pace since 1994. and what is more. 115 .. On this note.Real Estate Canadian Dollar Chaos Poor consumer confidence and continuing job uncertainty. followed by mining company Inco’s $4. and evidence of a downturn in profits should continue to drive merger and acquisition activity. This is already in evidence. the decline in this most important sector in the Canadian economy has created very disturbing trends in several areas. the domestic nature of the Canadian banking system is oriented towards servicing the mortgage market second only to its growing reliance on incomes from stock broking and trading activities. Moreover.7 billion. For instance.7 percent over a one year period. regardless of the usual Government of Canada guarantee on such loans. as is the preference for the Canadian banking system to lend to large internationally syndicated projects. it can be argued that both demographics and the changing geo-political climate in the world are both working against any upward correction in real-estate prices. not to mention increased securities operations. Recently. the new housing price index has decreased by 2. The deal base shifted from the large to medium-sized sector. In addition. coupled with the downsizing of good paying public sector jobs has joined demographic trends in depressing most of the Canadian real estate sector. Mergers & Acquisitions The prolonged climate of low growth. Early evidence from the first quarter of 1996 shows that the dollar volume of transactions was the strongest on record. Any downturn in the value of the assets that these mortgage loans are based on. will affect the quality of the banking system’s assets.

which will boost its market share in nickel to just over 40 percent. A pervasive climate of uncertainty has been created from dramatic technological changes. In a bid to gain control over the massive Voisey Bay nickel project in Labrador. has moved its stake in the mine from 25 to 75 percent. original equipment automotive parts manufacturer Magna International Inc. This. Magna will acquire six plants. In addition. has responded to a recent government white paper that recommends further deregulation and a more open domestic regulatory regime to foreign competitors. has paid $100 million in acquiring UK joint-venture partner Marley Plc. coupled with the fall of communism and the dramatic collapse in the property price bubble. In turn. some Canadian banks have agreed to this. only if the government would allow them to merge with other fellow Canadian banks. Specifically.G7 Books . forming large international banks that could compete more easily in the changing climate. Currency Forecast Clearly. able to draw on the capital base of their parent banks. Ltd. as Canada’s largest bank. and Nissan Motor Co. Further activity will be expected in the Canadian banking sector. the sixth largest acquisition transaction in Canadian history. The Royal Bank of Canada. 116 . as companies’ profits are on a downswing. with a provision for a buyback of one-third of the new stock with a four year period. and may even begin to challenge its lows with respect to the US dollar. combined with the general de-stocking of inventories and weak export markets. will see Inco issue 51 million common shares as part of the overall purchase agreement. Inco Ltd. The upside for the Canadian dollar under such circumstances is limited. the foreign banks have requested that their operations in Canada be treated as subsidiary operations. along with new assembly business from the likes of German-owned Rover Group Plc. The industry-specific situation is not any better. the industrialised countries in the world continue to stagnate.

5 -5.7 -6.2 -5.3 -6.Vans.Buses (1) April 1995 to April 1996 (2) March to April 1996 Source: Statistics Canada Canadian Dollar Chaos (1) 1.5 -2.2 11.2 -5.9 117 .9 -0.New Automotive Sales (%change) New Motor Vehicles Passenger Cars North American Imported “Big 3” manufacturers Other manufacturers Trucks.3 -30.2 -4.2 (2) -6.9 -7.8 -7.

gains control of the old & directionless publisher Southam Inc. a recent survey by our contributing editor and automotive expert Dennis DesRosiers reveals an equally disturbing trend in the new and re-sale automotive markets.2% in 1996 over last year $ new orders for durable consumer goods & retail trades decline $ all levels of government begin to seriously consider privatising various divisions $ Conrad Black’s Hollinger Inc.Third Quarter: August 7. $ small business liquidity continues to deteriorate as used car purchases begin to exceed new car purchases Just as when demographic shifts in the Canadian population base brought the country’s building and housing sector to a virtual halt. DesRosiers shows that of all vehicles acquired in the past year. 64 per- 118 . not only in Canada but also in the UK and France. Stagnating incomes and consumer uncertainty have shaken the normal buying patterns in the new car market. 1996 $ Canadian banking consolidation begins as CIBC and the Bank of Nova Scotia combine on back room operations $ mid-market manufacturing companies continue to hollow-out as large corporations cut back on contracts $ foreign investors begin to shift portfolio investments in Canadian securities to stocks & out of money markets $ US investors increase investments in Canadian stocks to record levels $ corrections on the Toronto & Montréal stock exchanges closely follow the sell-offs on Wall Street $ companies plan to increase business investment by 2.

to very optimistic forecasts that base their logic on the steady replacement of a very large stock of used cars stretched over a number of years. can also be interpreted as a sign that most of today’s vehicles are manufactured with a high level of precision and quality in mind. Consequently. since the depreciation schedule has been informally extended over five to even seven years. changing habits and tastes are combining with falling standards of living to raise a number of concerns in the most vital industrial sector in Canada today. It is expected that sales will continue to be driven by replacement demand. but the way of doing business is very different from just one decade ago. Canadian Dollar Chaos Foreign Investment Recent international securities transactions have been directed towards the record purchase of stocks. as vehicles already aged from six to ten years begin to reach the end of their productive cycles. The implications of this gain in technical efficiency are very unclear at this moment. marked by the fall of Olympia & York property developments. Radical changes in the automotive sector have combined with demographic and technological changes to erode overall living standards in Canada. the growing preference of consumers to purchase used vehicles in today’s marketplace. most of the 119 . the auto sector was central to the framework of negotiations. while 1996 has revealed signs of deceleration from the levels recorded in previous years. and upon closer reading of the North American Free Trade Agreement (Nafta).cent were used and just 36 percent were new. Not only has the level of business activity changed. It has been argued that the lengthening replacement schedule derived from better-made vehicles will result in noticeably lower uses of productive capacity in the auto sector. In addition. it no longer makes any sense to habitually change a vehicle after every two to three years. that are aged between six and ten years. More and more. Automotive sector performance is vital to the economic prosperity of Canada. the Canadian economy has undergone very abrupt structural changes. In following the general global trend. The automotive industry has experienced steadily rising growth from 1992 to 1995. After the spectacular collapse in commercial property values in the early 1990s. the number of vehicles that are aged between six and ten years have risen to 41 percent of all vehicles in operation today. and now with technology making large-scale banking redundancies inevitable in the latter half of the 1990s. Clearly.

has also spurred some US based fund investors to dump Canadian equities. the first half of 1996 has registered a net inflow of foreign money into the stock markets. The deal.G7 Books influx of cash has originated from US based institutional and mutual fund investors. the National Bank of Canada has tentatively acquired the domestic Ontario-based branch network of Municipal Financial Corp. have far exceeded the shortfall in the traditional spread that favoured Canadian money-market instruments. sales and purchases of Canadian stocks initiated by foreigners has exceeded $10 billion per month in 1996. The general stock market “correction” that has come in July 1996. once approved by financial services regulators.5 million which is below the Municipal book value. will raise the number of National’s Ontariobased banking branches to 123 from 94. putting further pressure on the Canadian dollar. as opposed to the 8. Overall. the foreign purchase of stocks has come at the expense of money market financial instruments. Instead. but has instead shifted the funds into Canadian stock markets. the buoyant stock market activity has prevented a complete repatriation of cash. Mergers & Acquisitions In a move to diversify its regional Québec based banking operations. What is striking is the fact that the record investment in Canadian equities has not added any new net capital inflows.5 percent spread available over US instruments. This difference in rates of return favouring Canadian equity investments. Canadian stock prices. So far. they can lead to more volatility than the traditional short-term money-markets and bond investments driven by the 1. as financial outflows have driven down the value of the Canadian dollar to the high 0. Moreover. the move can be justified more on the grounds of diversifying political risks. Overall. Although equity investments in Canada by foreign investors are generally “blue-chip” in orientation. Despite recent evidence of the short-term money-market differential favouring US financial products over similar Canadian based investments. as measured by the Toronto Stock Exchange 300 Composite Index gained 11. than it can on sound profit strate- 120 . The attractiveness of US capital shifts into the Canadian market has been supported by gains in Canada exceeding those available in the US on similar riskweighted products.72 US cents range.3 percent in the first five months of 1996. over $5 billion worth of equity investment has been accumulated by US investors. Evidence of this volatility has come to light recently.6 percent return on comparable US stocks as measured by the Standard & Poor’s Composite 500 index. The deal has been negotiated at $35. In specific terms.

462 966 -2.838 -2.957 121 . further defensive moves in securing profitability have been evident in the Canadian banking sector. given the uncertainty surrounding the existence of physical branch banking in a period of revolutionary technological change. Should more volatility emerge in global stock markets.517 -5. the Bank of Nova Scotia.941 -2.591 1. More in tune with the new technological environment that currently grips global banking.194 237 957 5. enormous pressures on the Canadian dollar could materialise as US funds withdraw.362 More use of electronic processing units in heavy-traffic retail operations will be central to CIBC’s overall strategy.158 14.258 -211 2.346 1.045 1. International Finance in Canada ($millions) -168 -62 166 2. is the move by Canada’s second largest bank CIBC. to concentrate on consumer banking opportunities that transcend the traditional physical presence of branch banking.610 -2.324 944 380 -1.470 892 10. the situation has become much more volatile in context to foreign financial flows.469 -2.303 3. In addition.473 16.084 2.375 434 May/96 Jan-May/95 Jan-May/96 Total Investment Bonds (net) Outstanding New Issues Retirements Money Market (net) Government Other Stocks (net) Outstanding New Issues Source: Statistics Canada 7.484 -13. as CIBC has combined its back office operations with those of the fourth largest and most international of all Canadian retail banks. Canadian Dollar Chaos Currency Forecast With falling interest rates and a narrowing of the traditional spread over comparable US bond investments.467 11.

4% & 1. manufacturers that are in the business of exporting more than fifty percent of their product to the United States are very profitable. Not only is this evident in the fast-growing knowledge based industries.7 countries rank Canada in best overall position by IMF & OECD $ US steps up acquisition activity in Canada in real estate & industrial products sectors Successes in negotiating a North American Free Trade Agreement that benefits Canadian manufacturing.7% respectively $ business investment & operating profits of Canadian enterprises falls by 3.6% respectively $ manufacturing shipments & new orders increase as foreign investors look to acquire manufacturing base $ increasing competitiveness in Canadian industry & budget controls begin to create positive sentiment for dollar $ political & economic uncertainties in other G. but is apparent in the raw materials and automotive sectors. together with a very competitive dollar has raised the interest of foreign companies wanting to acquire a manufacturing presence in Canada. 1996 $ Federal government of Canada will seek a legal ruling by the Supreme Court on Quebec’s plans to separate $ Quebec Premier Lucien Bouchard causes dissension in Parti Québécois over his opposition to unilingualism $ exports rise to the US & Japan but fall with most other important trading partners in July $ new softwood lumber agreement with the US results in a one-third rise in exports in July $ strong demand in the US causes motor vehicle exports & parts to rise by 6. Softwood lumber products which have been 122 .0% & 4.Fourth Quarter: October 2. Once again.

The other twothirds of goods and services that are produced locally. while causing the dollar to appreciate. Most US investors have adopted the sentiment that Canada is a very good investment at this moment. Exports saw increases mainly to the United States and to Japan. the auto pact that was since carried over into the new Nafta agreement. this group is 123 . As they reached their highest level in July since February of this year.1 percent in July to a record $22. It is only the one-third of Canadian industry that can be deemed to be the most globally competitive. However.a traditional sore point in Canada-US trade relations. Canadian monetary policy has been mainly shaped by the conditions that are representative of this domestic sector. In particular. has been a shock initially to the overly-domesticated managers of Canadian companies. It can be said that Canadian companies are finally taking full advantage of the emerging climate of globalisation. Canadian Dollar Chaos Falling Interest Rates Despite the successes in trade relations with the United States recently. has continued to perform well. imports began to increase faster than exports.5 billion. have responded to a recent clarification of the problem by raising exports by one-third. Canada’s overall exports advanced by 2. Four years of a changing corporate managerial culture. are subjected to continuing depressed business conditions domestically. Specifically. Recently. together with an aggressive push to educate the newly-emerging leaders of business in universities.7 group of industrialised countries. but decreased in most other important markets. based on its relative merits among most other members of the G. The push towards the US market by Canadian producers seems to be reaching a point of maturity. Most of the main trading partners to Canada sold more industrial goods and machinery. Likewise. creating a small drop in the overall trade surplus. The manufacturing sector began to take advantage of the very competitive Canadian dollar. seems to finally be bearing fruit for the Canadian economy. By lowering rates for the fifth consecutive time in 1996. instead of following recent history and coming to its defense. things are not so good with the two-thirds of economic activity in Canada that is not subjected to cross-border commerce. he has displayed a very rare degree of independence. despite the existence of free trade agreements. Bank of Canada Governor Gordon Thiessen has made a recently unprecedented break with US monetary policy. The initial fall of communism coupled with the tremendous technological developments together with perfect capital mobility. The increase in imports has outstripped some of the good news in the export sectors.

which is a stretch that has only been equalled since the Great Depression of the 1930s. and really have very little bearing with the two-thirds of the economy that remains subject to defensive strategies of job losses and restructuring. the historical investment spread has been attacked. it is in the residential side of the US market that recent activity has made the best showing since that in 1989. As with most property sectors in the industrialised world. Central to the problems in the domestic sector has been commercial property development and residential mortgage sales. Likewise.G7 Books very bullish towards the Canadian dollar. it is expected that the prime rate of interest charged by Canadian chartered banks to their best customers will continue to hold steady. coupled with very high rates of unemployment. In fact. This will hold as long as the dollar continues to hold its ground and stock markets stay steady. commercial property has shown some signs of revival in the UK market. as it moves in sharp contrast to the on-going austerity measures introduced by the federal government and the provinces. while bankers in most countries still show a very deep aversion to financing any grand projects which are not very conservatively capitalised. This has been one of the main reasons for the increased demand for Canadian softwood lumber exports in the summer of 1996. and have continued to fall ever since. Recently. Likewise. activity continues to barely respond to low interest rates. The trend with short term rates is that they have dipped below comparable US rates in February of this year. Monetary policy has been shaped by this two-thirds uncompetitive sector. or fall even further. This will 124 . it can be said that the policies being followed by the government spending programs more closely correspond to what is necessary in the robust and competitive export sector. In fact. evidence on the jobless rate indicates that it has exceeded the nine percent point for every month for the past six year period. as the spread on two year bonds was about one percent. as an almost complete cessation of building over the past four years has caused demand to exceed the space that is currently available. Currently. a window of opportunity has opened up for the continued reductions seen in short term interest rates. With US investor sentiment going one way and Canadian monetary policy the other. while monetary policy has been responding to the intensive care that is required for the battered two-thirds of the economy that is the domestic sector. while that on five year bonds has dipped below their US counterparts. as some have even voiced their opinions that they believe that the Canadian currency is on its way to once again achieving parity with the US dollar (see Dennis Gartman interview in this issue). It may be possible to conclude that these sentiments are mainly based on observing recent Canadian trade successes south of the border.

Problems in Europe with recessions in France and Germany. as record low levels of financing should spur more activity in the housing market. group. as debt burdens will be reduced even more through a rise in evident in the consumer mortgage credit market. New York based Standard Motor Products Inc. Currency Forecast The positive sentiments created in the US by the successes of fiscal cutbacks by the Federal government and the provinces. CIBC and Royal are both acquiring a five percent stake in Mondex International. has generated some early debate within the Canadian business community. Royal Bank of Canada and Canadian Imperial Bank of Commerce acquire the worldwide electronic bank payment card system Mondex International Ltd. to European engineering groups. has acquired Montréal based manufacturer of brake pads Fibro Friction Inc. From the large Japanese trading companies to medium-sized US based automotive parts producers. all are in the hunt for possible acquisitions of Canadian companies that are exposed in a big way to the outside world. the CIBC and Royal banks will hold the Canadian franchise rights for the Mondex “smart card” in Canada. along with the colossal Japanese banking problems. In contrast. developed by UK based National Westminster Bank. Canadian Dollar Chaos Mergers & Acquisitions Most foreign manufacturers and trading groups can sense how profitable the Canadian manufacturing sector has become. has joined the transformation of Canadian manufacturing industry as the main reasons for the early interest in the Canadian dollar. Walker Steel. with National Westminster retaining a ten percent stake in the project. Manufacturer and distributor of gas wellheads in the Emco Ltd. the politicisation of the operations of the Bank of Canada under the relatively new leadership of Governor Gordon Thiessen. In the automotive parts industry. is how much more independent can Canadian interest rate policy be from that of the Federal Reserve? The recent 125 . was acquired by Texas-based provider of oil and natural gas field services ABB Vetco Gray Inc. for $19 million in cash. The fast changing global financial services industry saw both of Canada’s largest chartered banks.. In turn. have created relative sentiments in favour of Canadian investment paper. The question at this very moment. joining US based Wells Fargo Bank and AT&T and a consortium of European banks.

G7 Books strength may come to a quick end. 126 .75 cents US level. For the time being. Any further movement upwards will be countered by the Bank of Canada’s policy of yet even more lower short term interest rates. once the US central bank decides to raise its short-term rates. the dollar should enjoy some welcomed strength and challenge the 0. perhaps after the US presidential elections in November.

as conversions of old commercial space are brought onto the market.Second Quarter: June 3. The actions of the Bank of Canada continue to indicate reservations about jeopardizing the recovery in any way. and only when circumstances warrant the move. although showing signs of maturity still hangs on a very thin thread. Evidence of which is the continued spread over the prime lending rate in the US of an average of 3. 1997 Investor’s NewsFlash • dollar continues to trade at low end with respect to US dollar • real estate sector shows signs of revival as new condominium projects and conversions of unused commercial space reach impressive levels • Bank of Canada rate remains at minimally acceptable level in support of the dollar • Canadian banking sector begins to grow through acquisition of US boutiques and brokerages • federal government halts new borrowing for the first time in 25 years • no new bonds will be offered to finance operations as finances head towards a surplus position • as provincial debt declines the only investment in the bond market will remain corporate bonds evidence of which shows an increase of $10 bn. through a very slow and cautious policy of gradually moving the bank rate up very slowly. Although the real-estate sector is showing early signs of recovery in Ontario.0% The Canadian recovery. and a continuing weak Canadian dollar.5% as prime remains at 5. there still remains the fact that an unprecedented amount of space has been taken 127 .0 percent in favour of Canadian borrowers. in the past year • bank rate climbs one-quarter of a point to 3.

The danger being that the Canadian-US trade relationship could become similar in nature to the one that currently exists between the US and Japan. has been successfully sold in the Condominium market. Since the election of the Clinton administration.G7 Books off of the commercial real-estate market since the recession of the early 1990s. It is as if the Canadian dollar must continue to be pegged at its historical lows with respect to the US dollar. Although recovery is at hand in the industrial provinces of Ontario and to a lesser extent. although at the low margin end more so than at the luxury level. There currently exist fears in Canada over a similar brand of politics. the US has used the dollar-yen relationship as an outlet for policy. in order to ensure a healthy performance on the real side of the economy. With a Japanese trade surplus that cannot seem to fall. just as it has become so for trade relations with the Japanese. will impact many companies’ profit margins. It would not be surprising that the low Canadian dollar over the past three years would become the negotiating tool for US trade policy. to address some of the competitive disadvantages that US industry is currently having against Canadian imports. it remains fragile and requires the existing low rates of interest along with a very competitive exchange rate in the US. This is a situation that never existed to such a great extent in history as it does now. making Japanese exports more expensive to US consumers. as there already is evidence that Congress is considering a re-negotiation of some aspects of the North American Free Trade Agreement (Nafta).76 cents to one US dollar. that the movement of the dollar upwards beyond $0. Quebec. The Canadian economy has become so tied to the export markets of the US and to a lesser extent Latin America and Mexico. What has not been demolished. any rumblings on the trade deficit over an extended period of time always brought a correction in the yen upwards. hence shutting off any increase in demand for cars and electronic products. Should there continue to be an escalation of the Canadian trade surplus to even greater levels. 128 . The issue more and more centres on US industry’s annoyance at the success that Canadian exporters are having in their own domestic marketplace. then the US may decide to seek a “political solution” to the problem.

Third Quarter: September 29. The actions of the Bank of Canada continue to indicate reservations about jeopardizing the recovery in any way. and a continuing weak Canadian dollar. Although the real-estate sector is showing early signs of recovery in Ontario. through a very slow and cautious policy of gradually moving the bank rate up very slowly. 1997 Investor’s NewsFlash • dollar continues to trade at low end with respect to US dollar • real estate sector shows signs of revival as new condominium projects and conversions of unused commercial space reach impressive levels • Bank of Canada rate remains at minimally acceptable level in support of the dollar • Canadian banking sector begins to grow through acquisition of US boutiques and brokerages • federal government halts new borrowing for the first time in 25 years • no new bonds will be offered to finance operations as finances head towards a surplus position • as provincial debt declines the only investment in the bond market will remain corporate bonds evidence of which shows an increase of $10 bn. although showing signs of maturity still hangs on a very thin thread. and only when circumstances warrant the move.0% The Canadian recovery.0 percent in favour of Canadian borrowers. in the past year • bank rate climbs one-quarter of a point to 3.5% as prime remains at 5. 129 . Evidence of which is the continued spread over the prime lending rate in the US of an average of 3. as conversions of old commercial space are brought onto the market.

The Canadian economy has become so tied to the export markets of the US and to a lesser extent Latin America and Mexico. in order to ensure a healthy performance on the real side of the economy. The danger being that the Canadian-US trade relationship could become similar in nature to the one that currently exists between the US and Japan. Should there continue to be an escalation of the Canadian trade surplus to even greater levels. has been successfully sold in the Condominium market. It would not be surprising that the low Canadian dollar over the past three years would become the negotiating tool for US trade policy. the US has used the dollar-yen relationship as an outlet for policy. that the movement of the dollar upwards beyond $0. just as it has become so for trade relations with the Japanese. Although recovery is at hand in the industrial provinces of Ontario and to a lesser extent. will impact many companies’ profit margins. hence shutting off any increase in demand for cars and electronic products.76 cents to one US dollar. any rumblings on the trade deficit over an extended period of time always brought a correction in the yen upwards. It is as if the Canadian dollar must continue to be pegged at its historical lows with respect to the US dollar. then the US may decide to seek a “political solution” to the problem. 130 . making Japanese exports more expensive to US consumers. With a Japanese trade surplus that cannot seem to fall. it remains fragile and requires the existing low rates of interest along with a very competitive exchange rate in the US. Quebec. Since the election of the Clinton administration. to address some of the competitive disadvantages that US industry is currently having against Canadian imports. although at the low margin end more so than at the luxury level. What has not been demolished. There currently exist fears in Canada over a similar brand of politics.G7 Books there still remains the fact that an unprecedented amount of space has been taken off of the commercial real-estate market since the recession of the early 1990s. as there already is evidence that Congress is considering a re-negotiation of some aspects of the North American Free Trade Agreement (Nafta). The issue more and more centres on US industry’s annoyance at the success that Canadian exporters are having in their own domestic marketplace. This is a situation that never existed to such a great extent in history as it does now.

Ever since “Team Canada” trade missions began circling the globe in pursuit of contracts for Bombardier and Northern Telecom. and by equal measure escaping the small and inactive domestic marketplace in the new era of globalisation. Indonesian Rupiah and now the yen has left the Canadian export sector badly exposed and in need of cus- 131 . The collapse of the Thai Baht. 1998 Investor’s NewsFlash • federal government delivers balanced budget and forecasts a $5.First Quarter: January 30. something even more disturbing was happening in the far east and in Russia.0 billion surplus in 1998-99 and $10 billion the year after • Bank of Canada extends inflation target of 1 to 3% until the end of 2001 • federal debt to GDP is forecast to fall to 63% by 2000-01 • political stability as Jean Charest becomes opposition leader in Quebec • trade surplus falls to $1.7 billion in January reflecting reduced exports of machinery and forest products • Japanese investors continue to repatriate their Canadian based investments Trade strategy for far east falls into disarray • Canada begins negotiations to become member of European Free Trade Association • more bank mergers as CIBC and TD announce intentions • exports to Japan fall by 33% • all economic indicators peak as commodity pressures sink dollar Throw away the Finance Ministry and the Bank of Canada because Canada’s economic policy is now determined by what happens in Asia and Japan! Evidence of the ineffectiveness of domestic economic policy making is now coming into real focus.

have devalued the credibility of the Bank. taking the dollar downwards. The current climate of resource deflation has effectively sidelined any existence of a monetary policy. Not only has the meltdown in Asia forced the cancellation of numerous contracts for commodities. In fact. The lapse into recession of the Asian trading zone has revealed just how exposed the Canadian economy is to that part of the world. as the Bank of Canada’s refusal even to consider the raising of short-term rates. it also indicates just how resource-based the country still is. the Asian crisis is a real slap in the face. Consequently.G7 Books tomers. Not only has the Bank of Canada been marginalised in the collapse of resource and commodity prices. Canada may be faced with even more problems as the profitability of its manufacturing and export sectors comes under further attack from the US. With more and more cheap imports attacking the US market. but the crisis has also caused another relapse in the price of gold. Not only have production-based commodities fallen. but the growing inclusion of Russian based raw materials on world markets has also had undesirable effects on the prices of Canadian based natural resources. have already caused pricing pressures on domestically-produced items. Forecast The deluge of cheap products that will be sent from Japan to the US and with the real prospect of even more competitive devaluations in Asia. which will in turn reduce the demand for Canadian exports. sending stocks to challenge their lows and confirming the new lower trading range of the dollar at the bottom of $0. as in this new era of globalisation and information technology. has unnerved dollar based investors even further. growth rates are bound to be affected. The challenge that Canadian exporters will have is to further raise productivity to counter the pricepressures from the Asian market. 132 .65 to $0. the recent business slowdown in the Asian region has caused a structural decline in the price of commodities. despite the growth in financial services and in high technology in most of its major cities.75 US. the dollar will fall even further. Canadian resource exports are still the supreme fundamentals that drive the value of the currency. In a related way. but rumours abound that the inaction of Governor Gordon Thiessen in raising rates even to support the dollar symbolically. causing even more dollar grief. Failing this.

0 billion surplus in 1998-99 and $10 billion the year after • Bank of Canada extends inflation target of 1 to 3% until the end of 2001 • federal debt to GDP is forecast to fall to 63% by 2000-01 • political stability as Jean Charest becomes opposition leader in Quebec • trade surplus falls to $1. The collapse of the Thai Baht.7 billion in January reflecting reduced exports of machinery and forest products • Japanese investors continue to repatriate their Canadian based investments • trade strategy for far east falls into disarray • Canada begins negotiations to become member of European Free Trade Association • more bank mergers as CIBC and TD announce intentions • exports to Japan fall by 33% • all economic indicators peak as commodity pressures sink dollar Throw away the Finance Ministry and the Bank of Canada because Canada’s economic policy is now determined by what happens in Asia and Japan! Evidence of the ineffectiveness of domestic economic policy making is now coming into real focus. 1998 Investor’s NewsFlash • federal government delivers balanced budget and forecasts a $5. Indonesian Rupiah and now 133 . something even more disturbing was happening in the far east and in Russia.Second Quarter: June 19. Ever since “Team Canada” trade missions began circling the globe in pursuit of contracts for Bombardier and Northern Telecom. and by equal measure escaping the small and inactive domestic marketplace in the new era of globalisation.

it also indicates just how resource-based the country still is. the recent business slowdown in the Asian region has caused a structural decline in the price of commodities. Not only has the meltdown in Asia forced the cancellation of numerous contracts for commodities. causing even more dollar grief. With more and more cheap imports attacking the US market. Canada may be faced with even more problems as the profitability of its manufacturing and export sectors comes under further attack from the US. Forecast The deluge of cheap products that will be sent from Japan to the US and with the real prospect of even more competitive devaluations in Asia. the dollar will fall even further.75 US. The challenge that Canadian exporters will have is to further raise productivity to counter the pricepressures from the Asian market. 134 . have devalued the credibility of the Bank. Not only has the Bank of Canada been marginalised in the collapse of resource and commodity prices. growth rates are bound to be affected.65 to $0. In fact. as in this new era of globalisation and information technology. Consequently. have already caused pricing pressures on domestically-produced items. The lapse into recession of the Asian trading zone has revealed just how exposed the Canadian economy is to that part of the world. taking the dollar downwards.G7 Books the yen has left the Canadian export sector badly exposed and in need of customers. has unnerved dollar based investors even further. The current climate of resource deflation has effectively sidelined any existence of a monetary policy. Canadian resource exports are still the supreme fundamentals that drive the value of the currency. but the growing inclusion of Russian based raw materials on world markets has also had undesirable effects on the prices of Canadian based natural resources. but rumours abound that the inaction of Governor Gordon Thiessen in raising rates even to support the dollar symbolically. In a related way. despite the growth in financial services and in high technology in most of its major cities. the Asian crisis is a real slap in the face. sending stocks to challenge their lows and confirming the new lower trading range of the dollar at the bottom of $0. but the crisis has also caused another relapse in the price of gold. Not only have production-based commodities fallen. as the Bank of Canada’s refusal even to consider the raising of short-term rates. which will in turn reduce the demand for Canadian exports. Failing this.

65 to US$0.75 to US$0. 1998 Investor’s NewsFlash • federal task force on financial services rules favourably to planned banking mergers • department store sales fall 4.800 • worries in financial services sector over possibility of a bear market in Canadian stocks • EU joins Japan in challenging Canada at the World Trade Organisation over its Auto Pact tariff on imported vehicles • dollar hits all-time low of US$0.80 range. It now hovers just above the low end of this range.7% that was registered in the first quarter of 1998 • CIBC issues profits warning over slowdown in trading revenues as banking shares take a huge hit in August • Toronto Stock Exchange TSE300 index falls to 5. who only a year ago were forecasting that the dollar would progress towards the US$0. climbing from its most recent low of US$0.Third Quarter: September 20. Not only has this unprecedented trend been lost in the overall global crisis that is affecting many corners of the globe. What is even more disturbing from the perspective of foreign investors in Canadian dollar denominated paper securities.70. is the double effect that they have had 135 .600 from a peak range of 7.634 as Bank of Canada raises rate by 1% The dollar has broken through our most pessimistic trading scenario of US$0.0% from the 3.634. it comes as a severe shock to most establishment commentators and analysts.9% in June for the third consecutive month as domestic spending begins to fall • GDP forecasts have been downgraded for the second half of 1998 to 2.

the fall-out has mainly been caused by the banking sector. than it has by the trade fundamentals or by foreign direct and portfolio investment. the Bank argued that the extremely cheap currency was viewed as a proxy for a lower interest rate in Canada. Losing some 30 percent of its value in just one month. a more compelling reason for dollar weakness can be explained by the fundamentals. where the resources of Russia and China were increasingly being tied to a market Forecast The dollar can only be rescued by a strong figure at the Bank of Canada that is willing to reassert its authority. the TSE300. many are quick to point to the effect that the Asian crisis will have had on commodity prices. after it issued an unexpected profits warning from a fall in trading revenues. This may or may not lead to an immediate effect on the value of the dollar. Aside from the fact that the Canadian dollar has been adversely affected by the lack of credibility coming from the Bank of Canada. On trial by global investors has been the entire establishment and elite that run the country. However. 136 . The Bank of Canada has further lost credibility by responding in a most untimely fashion to the dollar crisis. What foreign investors and business people continue to focus on is how Canada is adjusting to an increasingly global economy. a price collapse from a contraction in global demand will create a trade balance deficit. the dollar has been more driven by the status of Canada’s rate of unemployment. With some 40 percent of Canadian exports being composed of commodities. despite the fact that the country was caught in a severe commoditiesinduced deflationary spiral. the bank reacted to this by raising its bank rate by one percentage point. Consequently. but they have also been caught in a substantial correction on Canada’s main stock market index. After hitting its all-time low.G7 Books to contend with recently. to only a handful of Canada’s business leaders that truly know how to compete in a global economy. Throughout the 1990s. Not only have they been drastically affected by the unprecedented move downwards by the Canadian currency. From the politicians’ over-reaction to Quebec separation. and that the G7 group of countries may very soon engage themselves in a co-ordinated general rate reduction to counter the growing global financial turmoil. the dollar’s decline has been in the works for a very long time.

they are now restricted in their choice of only five or six “blue-chip” industrialised country currencies.6 billion • Canadian Government rejects the banking mergers proposed by the Royal Bank and Bank of Montreal and by the CIBC and the TD Bank on the grounds that there would be very little competition in credit cards. francs. The G3 composing the US. 1999 Investor’s NewsFlash • economic growth slows to 1. warns that no further merger proposals would be considered from banks until a review of financial services regulation was completed • dollar rebounds from recent lows as the launch of the Euro makes it more attractive to investors The Canadian dollar began 1999 on a positive note. retail brokerage and retail branch banking services • Finance Minister Paul Martin jr. together with the pound sterling.4% in the fourth quarter while a weak dollar lowered the balance of payments deficit from C$20. while the Canadian dollar. escudos.First Quarter: January 16. marks. Swiss franc and the Australian and New Zealand dollars will make up the second tier. Japan and Europe will capture most of the liquidity available on the international markets. The launch of the new euro currency has re-denominated most securities issued by the 11 participating members voiding their previous national denominations. as the global currency markets were undergoing a mass reconfiguration of investment strategies.6 billion • Exports to the US rose by 1. Instead of investors being presented with a choice of punts. 137 .9 billion in the second quarter to C$17.8% in the 3rd quarter as retail inventories fall by C$4. pesetas. guilders and markka’s.

investors were preoccupied with betting on the exchange rate direction of various fixedincome and equity investments. Set back by political concerns over Quebec’s possible separation. Supplies flooding international markets from emerging market countries. The US has countered by threatening to impose broad-ranging sanctions on industrial and agricultural products. With the elimination of 11 blue-chip currencies. dollar investors can take some comfort in the launch of the euro.G7 Books The Canadian dollar will benefit to a certain degree from the launch of the euro. Trade wars instigated by the US call for a stronger Canadian dollar. by preventing US mega-media groups’ access to the Canadian advertising market via split-run editions of US magazines.” Likewise. With Canada threatening to protect its cultural heritage. With growing reliance on the US market. the Cultural Minister has threatened to impose various forms of tax or subsidy measures to protect the fledgling Canadian magazine market. just as with the yen in Japan. 138 . joined technological change in oil exploration and the automotive sectors to further depress prices and profits. The 1990s were not very kind to commodity-based producers or to commodity exporting countries. as are the proceedings to impeach the president. For most of the decade of the 1990s. the Canadian dollar was not a favoured currency by foreign fund managers. Forecast As the US economy braces for a downturn. When a broad range of European currencies were available. the issue that surrounds US based “split-run” magazines in Canada remains very fragile. The launch of the euro also calls for a stronger dollar over the following quarter. European based investors will come to re-evaluate the dollar as an alternative choice which will only gain in prominence and acceptance. Canada needs a cheap dollar to be competitive. and the rough economic climate in the early to mid-1990s. trade rhetoric is now almost as intense in Washington. Recently. Although the real economic prognosis remains depressed for the foreseeable future in Canada. Canada was always considered to be ill-prepared for the new global climate of competition that unleashed Russia's vast natural resources on global markets to compete. the US unveiled a “hit list” that it hopes to use against selected European imports over the dispute concerning the EU “banana regime.

Most of the job creation 139 . 1999 Investor’s NewsFlash • dollar shows impressive gains in first quarter as external factors cause a flight to quality • resource prices stabilise as foreign investors begin to reconsider cyclical investments • dollar helped by war in Adriatic and by the adverse effects that it is having on the newly-minted euro currency • launching of the new euro works in dollar’s favour as less choices are made available to currency investors and speculators • seasonal unemployment heads higher while UK treasury announces the sell-off of 50 percent of its gold reserves hitting mining stocks • Toronto Stock Exchange posts 3rd best gains in first quarter among G7 members as cyclical and traditional non-technology shares come back into favour • banking sector braces for far-reaching rationalisations • inflation rises to 1 percent in March The recent move towards US$0. With a US population that is all too willing to consume imports. it has been the stimulus that this has provided exporters of manufactured products. Once again.Second Quarter: May 9. that has slowly pulled the economy out of the malaise that culminated in the close-call referendum vote in Quebec in 1995. the upward spike in the Canadian dollar is solely driven by external events. and in no way is it the result of good domestic fundamentals or management. For most of the mid to latter half of the 1990s. it has been the manufacturing sector of Canada.70 is an unwanted event that Canadian manufacturing interests can barely afford at this stage of the business cycle.

but will not be expected to cross into the US$0. In fact. as the positive effects on the value of the dollar are clearly evident now in the second quarter. it is not merely coincidence. In short. Should this movement relegate the global liberal market themes of the 1990s to the geo-political strategic sphere once again. since this is something that it just is not suited for culturally. Canada will experience an economic renaissance as a resource-producing country. with resources from the old Soviet countries cheaply available have not been good for the average living standards of Canadians. As was reported in previous issues. as dollar weakness combined with the US boom to lift Canada out of its lingering recession in 1996. By launching the new single currency. 140 . Forecast The dollar has made a comeback against the interests of manufacturing exporters. With growing concern in the instability caused by this unexpected war in the Balkans. there has been an overnight elimination of some ten “hard” investment grade currencies available to international portfolio managers and currency traders. the weakness of the euro in the first quarter.G7 Books that has occurred in Canada in the past two years is a direct result of the sales that Canadian firms have been making to a red-hot US market. along with the possibility of long term instability in the Adriatic over the war with Serbia. the world economic stage that has normally become accustomed to discussions over emerging market bail-outs over the past several years. with infant signs of old Cold War tensions resurfacing once again. is now moving in the direction of military strategies. that the dollar has been weak throughout the 1990s. which have been the foundation for recovery in the latter half of the 1990s. allowing all parties to re-position their books as well as their sentiments in favour of the Canadian dollar. Consequently. Times could not have been better for Canadian based exporters. The dollar will continue to benefit from a prolonged war in the Adriatic region of Europe. In addition. the 1990s period of global and open markets.70 cents range. the launch of the new single European currency would spring the Canadian dollar back into favour among foreign currency investors and speculators. has further heightened foreign interest in the Canadian currency. Canada has a very hard time competing on the global stage. This is in fact what has been happening.

numerous resource based companies in gold production and oil exploration have seen their capacities reduced.Fourth Quarter: October 8. is not a stance that Canadian monetary authorities share. Even the recent recovery in these commodity prices has not convinced investors that 141 . The recent pronouncement by Alan Greenspan.6 billion Net M&A Impact on the Canadian Dollar in Global Markets is Positive (+) Business activity continues to rise but not to the extent of positively impacting employment as well as reversing the downward spiral in interest rates. despite encouraging signs. that the Federal Reserve has adopted a bias in favour of higher interest rates. 1999 Toronto Stock Exchange warns over the use of creative accounting to inflate quarterly earnings trade surplus in July is the highest recorded since December of 1996 Gold and Oil price recovery should bring resource production back onto international commodity markets commercial real estate sell-offs by Royal Bank and CIBC depress sector Dollar hit by remarks at Federal Reserve over the prospect of higher US short term rates recovery in commodity prices fails to lift dollar beyond US$0.68 Cross Border M&A Effects on the Dollar Canadian companies acquiring foreign companies: 3 Capital Outflows From Canada From M&A: $3.6 billion Net Capital Inflows to Canada From M&A: $7. For the past several years. The collapse in these resource prices has depressed the western and northern regions of the country and has contributed in some way to a depressed Canadian dollar that found itself trading in a historically lower range relative to the US dollar. the recovery is still considered to be very fragile.0 billion Foreign companies acquiring Canadian companies: 7 Capital Inflows to Canada From M&A: $10. Still.

Many analysts have recently argued that the Canadian economy is far less resource dependent than many would tend to believe. The fact of the matter is that the export boom. and fewer and fewer mature industries. This may be true. The resource price increase has not helped. the currency is following the general long term decline in resource prices. has been driven by medium sized machine tool and traditional industrial product industries. it still comes up far short in relation to the environment in the US or in the UK.G7 Books the dollar should climb back above the US $0.70 range. the statistics are always at the bottom of the ranking. nor has the introduction of the Euro. although the banking system is much better from just four years ago. mainly to the US market. when it comes to financing high tech industries. The general consensus among high tech investment bankers in Toronto is that there really is no venture capital or proper financing still to this day for adequate high tech development. and data from Canada is usually comparable to the data generated from Italy. services and mixed industrial sector in several major regions across the country. Forecast The dollar continues to trade at its all-time historical lows. An “equity gap” exists in Canada just as much as it does in the UK. Only Japanese companies fail to surpass the Canadian volumes. is only reserved for the minority that are connected in some way with the big groups like Nortel. when considering cross border merger and acquisition activity undertaken by Canadian companies. Canada is really not a player in any significant way. 142 . They argue that there has been a great transformation over the past several years which has created a very strong high tech. Most of the “venture capital” in Canada that is allocated to high tech industries. What has this to do with the changing nature of the composition of Canada’s leading sectors? Since most of the leading-edge M&A deals usually involve high technology companies. Moreover. Canada still lags when its companies are compared to the activities undertaken in the global economy by comparable enterprises in other G7 industrialised countries. For instance. In short. however.

7 billion Net Capital Inflows to US From M&A: $40. Foreign Companies Acquiring US Companies: 37 Capital Inflows to US From M&A: $53. With no slowdown in sight in the US.46 bn. many have begun to take a long a critical look at what has been transpiring recently among Euro-zone members. With the Euro falling from the one-to-one parity level in relation to the dollar. and continuing momentum propelling the US economy to a record 108 months of business expansion.28 bn. trade deficit in 1999 • Interest in establishing presence in EU countries declines • Household and Corporate debts rise by 9. Net M&A Impact on US Dollar Value in Global Currency Markets is Positive (+) With the re-appointment of Federal Reserve Chairman Alan Greenspan to another four year term.2 and 11.January/ February. the Fed has been slowly raising short-term rates out of inflationary fears. the dollar continues its surprising record run-up against the Euro. despite definite signs of inversion in the bond yield 143 . 2000 • Shifting balance of power towards Capital Account will not affect dollar despite record $270 bn.5% in 1999 • Corporate debts at 45% of GDP highest in history • Fed raises rates to highest level in 4 years • Venture Capital Subsidiaries account for most of the profits of US banks • Nasdaq ends 1999 85% higher with P/E twice the peak of Tokyo market in 1989 • Greenspan re-appointed CROSS BOARDER M&A EFFECTS ON DOLLAR (Data for 4th quarter of 1999) US Companies Acquiring Foreign Companies: 25 Capital Outflows From US From M&A: $13. This.

however. has led to the only logical reason for the recent increase of rates by 0. TOP NEWS STORIES AFFECTING THE DOLLAR Equity risk premiums impact currency values • the lower the risk premium or the more international a stock is the greater will be its effect in the currency markets • savings rate rises from 1 to 1. any recent moves to raise short-term rates under a period of continuing sluggishness driven by unprecedented restructuring in the industrial landscape of Europe. to protect the Euro from further weakness. in December/99 • FTC asserts presence in large cross border M&A deals • venture capital quadruples in fourth quarter of 1999 • LBOs at all-time low while high-yield debt losses are at highest since 1991 144 . has resulted in greater scrutiny among investors in Euro assets. FORECAST Despite a historically high trade deficit. the dollar should remain in a strong position. means that sovereignty over monetary policy has been relinquished at the expense of the credibility of the central bank. from $24. has encountered some recent weakness in trades with the dollar. Only once this credibility has been re-gained among investors.G7 Books curve as the Treasury announces its aggressive campaign to buy-up and retire 30 year T-bills. Despite stating that it does not use the exchange rate to determine monetary policy. Recent moves to raise short-term rates by the European Central Bank (ECB).6 bn. European companies are showing high levels of interest in establishing a US presence via a buy-out of a US firm. the Bank of Japan has kept its word to never again re-inflate the financial system so as to re-create the conditions of a bursting “bubble” again.25 percent. In short. can the Euro once again climb back above the parity level with respect to the dollar. the dollar market has become mainly dependent on cross-border acquisitions and portfolio investments. together with record bankruptcies and re-structuring activity.4% in January • Greenspan warns of further rate rises after quarter point rise to 6% in February and warns bankers not to assume current boom represents a normal state of affairs • trade deficit widens to $28 bn. has spoiled the strength that the currency has been exploiting from a tight monetary policy that has been executed by an ever more credible Bank of Japan. and as long as the soaring high tech stocks continue to drive up the benchmark indexes. Continuing weakness in the domestic Japanese economy. After living through a decade aftermath from the “bubble” years of the late 1980s. The yen. Such moves have been associated with a central bank that has been quickly losing sovereignty over its monetary policy.

Any adverse sentiments reflected through a prolonged stock market correction will lead the Fed into an accelerated reversal in its stance on rates and beliefs that centre on an overheating economy. However. In fact. inflationary expectations are on the way down as accelerated competition in product markets is a good substitute for any further action by the Fed. Notable developments that have affected the progress of the dollar have been the short term rate inertia and the absence of any clear variables that are affecting the dollar/yen relationship. This. there currently exist sentiments of a “soft-landing” which investors are confident that the Fed will be able to engineer via its incremental interest rate policy.23 billion Net Capital Inflows to US From M&A: $20. Foreign Companies Acquiring US Companies: 22 Capital Inflows to US From M&A: $45.37 bn.March/ April 2000 CROSS BORDER M&A EFFECTS ON DOLLAR (Data for January/February of 2000) US Companies Acquiring Foreign Companies: 16 Capital Outflows From US From M&A: $24. Developments in the short term have been in contrast to the falling longer term yields on the benchmark thirty year Treasury. as the paradox of the Bank of Japan’s zero interest rate policy becomes ever more apparent against the surging short term US rates. 145 . Inflationary expectations seem to be at bay at the current moment. hence re-establishing the significance of a yield spread that continues to power the dollar at record highs relative to the euro. and to a lesser extent on the ten year bond. this relationship completely breaks down when the yen enters into consideration. Furthermore. in addition to the recent turmoil on the Nasdaq market set off by the FTC’s ruling against Microsoft’s monopoly position on the internet browser issue.90 bn. as the recent move in short term rates by the Fed have combined with an aggressive repurchase program that has been instigated by the surging surplus position of the US budget. recent moves on short term rates are bound to be reversed as soon as convincing signs of a slow down have begun to set in. has caused fearful investors to seek the security of Treasury bonds. Without a doubt. which have pushed inflationary expectations over the longer term lower. Net M&A Impact on US Dollar Value in Global Currency Markets is Positive (+) Alan Greenspan has once again pushed up short term rates by one quarter of a percent to six percent.

and has created a risk of higher prices based on the cost of imported oil. despite the opposition of the German Bundesbank to such a move. In the case of the yen. A narrowing of the short term spread on dollar and euro assets will lend more support to the euro. A lower euro has begun to positively affect the balance of trade in the EU. 146 . a slowdown in capital repatriation will cause the dollar to gain ground.G7 Books FORECAST The dollar is bound to head lower relative to the euro once signs of lower inflationary pressures begin to set in in the US economy. The European Central Bank (ECB) is poised to raise short term rates.

Net M&A Impact on US Dollar Value in Global Currency Markets is Positive (+) Judging by the actions of several prominent currency hedge funds.May/ June. which has been severely oversold.35 bn. Despite the stability in yen markets over the past several quarters. the dollar’s days as the strongest currency among G7 countries is numbered. 2000 • Investor Warren Buffet warns that the internet will create no more wealth than a chain letter and that it is a net negative for capitalists • S&P company profits are still up by 20% • FTC investigates online anti-trust issues • value of all M&A in 1999 is set at $1. This. most funds are making very large bets on the Euro.87 bn.100 billion • private investors regain appetite for Latin American stocks • LBOs surge among old economy firms taking them private once again • Investors still not making commitments to emerging market economies • IPO underwriting at second highest in first quarter • 65% of mergers fail to benefit acquiring company • dollar sentiment begins to fall CROSS BORDER M&A EFFECTS ON DOLLAR (Data for March/April of 2000) US Companies Acquiring Foreign Companies: 15 Capital Outflows From US From M&A: $22. Foreign Companies Acquiring US Companies: 22 Capital Inflows to US From M&A: $73.22 billion Net Capital Inflows to US From M&A: $50. combined with a heightened state of risk in the US economy after the Federal 147 .

At that time. With a Euro zone that is reaping the benefits of a record low currency and which is enjoying record low prices in the credit and money markets. Sentiments have favoured the US economic performance so much. FORECAST Go long the Euro. it is the lofty valuations of US stocks that will determine how far the dollar will correct should there be a puncture in the stock markets by the Fed. This time around. under Ronald Reagan’s investments and high tech stories so irresistible. after the Fed has pegged risk free rates to levels that can no longer be overlooked by investors. 148 . could reverse the record capital inflows into the US. the makings are once again in place that signal the need for a reversal in the value of the US dollar relative to the Euro. it is the US economy that may easily fall under scrutiny. revalued both the Deutsche mark and the Japanese yen relative to the dollar. No longer are dot. a turn around in the region’s economic fortunes is just around the corner. This situation is once again being played out.finally! Current parities between the old German mark and the US dollar have not been so out of line since the early to mid 1980s. the Plaza accords negotiated among G7 Finance Ministers. should there be an about face in investor sentiment spurned on by the unexpected aggressiveness in Fed policy. the dollar was overvalued based on the persistent and growing current account deficit in the US. yet this time around the current account deficit has been smothered by the inflows from portfolio as well as longer term direct investors that desire an exposure to the US economy. Any correction that is unexpected among the leading high tech stocks and the top Dow Jones performers. that fundamentals such as the record trade deficit have been overlooked as well as submerged under the record investment flows that have been favouring dollar based assets. This.G7 Books Reserve has opted to aggressively raise interest rates. could propel the US economy into a sudden recession far faster than most investors are prepared to admit. This time. The European single currency has hit bottom. After realising the imbalance in the mid 1980s. combined with a stubborn trade deficit. In short. will divert attention from the positive fundamentals that have been so prevalent over the past several years.

2000 • FDI at record level of $282. that productivity gains from the new information economy are irreversible. the Fed sees more high tech driven expansion in the west. In addition.47 billion Foreign Companies Acquiring US Companies: 24 Capital Inflows to US From M&A: $65. In its official report. 149 .51 billion Net M&A Impact on US Dollar Value in Global Currency Markets is Positive (+) Alan Greenspan is convinced more than ever before. the productivity gains generally from high technology are visible in reduced inventories which companies keep. • Internet sales jump by 1.S. as well as in information that is generated in order to better meet consumer demand and serve the marketplace.4% of available seat miles in U.4% higher than 1998 • FDI is three times higher now than in 1997 • FDI flows were driven by the high tech sector • anti-trust issues arise in UAL’s acquisition of USAirways as merged company will control about 27.2 % in first quarter • Manufacturing slows in May • Fed not expected to raise rates in election year any further • Internet companies will have trouble raising funds • Junk bond issues rise ten fold in May • $165 billion of international contracts affected by bribes to public officials over past 6 years CROSS BORDER M&A EFFECTS ON DOLLAR (Data for May/June of 2000) US Companies Acquiring Foreign Companies: 12 Capital Outflows From US From M&A: $17. Oregon and Washington state. with high tech gains continuing to drive house prices higher in California.9 billion in 1999 or 31.July/ August.98 billion Net Capital Inflows to US From M&A: $48.

more than ever before. the Nasdaq may be expected to rise further.000 level. As the good internet companies begin to absorb the weaker groups.S. as cash burn-out rates are continuing for some second-tier companies such as CDNow and will attract attention from reports of continuing losses and cash flow burn-out. 150 . It is relatively stable with respect to the yen. has recovered back near the 4.S. despite the fact that we are still in some sort of high tech overshoot correction in the stock market. despite the political manoeuvring in an election year. while the merger of the weaker will ensure that the high level of venture capital investment that was committed to these companies. while others such as Amazon. With rates expected to decrease. The downturn in the economy will come from the enormous competitive pricing pressures. The yen will remain strong at its current level. the Euro should see some life return to its trading pattern.G7 Books The Nasdaq high tech market which was close to falling into the high 2. given that there still exists a surplus of funding capital that is looking for alternative investments. despite a recent attempt to break out of its trough. This. the internet economy seems to have carved out a marginal hold over consumer buying patterns in the U. It is an indication of uncertainty. Now.” in the U. Greenspan admitted that rate increases may be coming to a natural end. will be preserved in some way by continuing the business in a restructured form. the evidence nonetheless points to slow marginal gains when it comes to online sales. will report increased earnings. Some internet companies will collapse. FORECAST The dollar continues to trade high relative to the Euro. as competitive pressures in the economy are creating uncertainty in the job market. and will ensure that disinflation will become the real problem over the second half of the year.000 range. The prime internet companies such as AOL Time Warner and Yahoo. The Fed should be thinking of a rate reduction at this point to engineer the highly desired “soft landing. only to be contrasted by the above expectations results that were generated from Yahoo.

many have stepped forward to criticise the move.75 billion Net M&A Impact on the Canadian Dollar in Global Markets is Positive (-) The recent increase in US short term interest rates prompted the Bank of Canada to match the half percent increase. 2000 • Bank of Canada Governor Gordon Thiessen steps down • UK Competition Authorities launch investigation over Air Canada’s takeover of Canadian Airlines • Reports of intensifying capacity pressures • DeBeers focuses on diamond exploration in Canada spending $28.September/ October. based on the fact that the Canadian economy has not experienced the rapid growth that is based on productivity gains driven by technological advances. The red hot tech economy of the US which was behind the move to raise rates. Since the increase. most notable of which have been Nortel Networks and telecoms group BCE.65 billion Foreign companies acquiring Canadian companies: 1 Capital Inflows to Canada From M&A: $900 million Net Capital outflows from Canada From M&A: $3. there have been a few global success stories that have come out of Canada. Although they make up nearly thirty percent of the market capitalisation of the Toronto Stock 151 . Sure.5 million • Nortel Networks becomes most profitable multinational company in the world • Hollinger to sell most of its community newspapers across Canada • Bank of Canada moves to raise central bank rate in step with Fed • Speculators attack dollar over rate hike fearing that recession is inevitable CROSS BORDER M&A EFFECTS ON DOLLAR Canadian companies acquiring foreign companies: 2 Capital Outflows From Canada From M&A: $4. was only lukewarm in Canada at best.

Canada’s over-reliance on retail growth means very severe price competition and disinflation. and the overall picture begins to look very different from the case being made south of the border. then a weaker dollar will be the only way out of the situation.69 level for a very brief period of time. Since the rate increase. the broader Canadian economy has experienced very uneven growth rates throughout the 1990s. they are not necessarily representative of the broader Canadian economy. Add in the commodity argument. including the “booming” latter half. a matching of the rate increase by the Fed is not warranted.G7 Books Exchange. There are areas that mirror the high tech boom of the US. large US retailing groups continue to expand in Canada. Already. but they are not representative of the overall composition of the economy. The recent rate increase may have gone just a little too far. A sector which is notable for experiencing severe price competition. The performance of the economy will come under even greater scrutiny over the next quarter for signs that growth has come to an end. 152 . Based on this view. The fears that are beginning to grip many investors are that growth can only maintain its pace at the expense of the dollar.66 and risks falling below this resistance point. To an even larger extent. In that respect. it has come back down to US$0. manufacturers are lobbying for an even weaker currency as the US market begins to slow somewhat. the broader economy in major cities is fast becoming dependent upon a growing retail sector. driving out their much smaller competitors based on price competition on purely economies-of-scale grounds. and may tip the Canadian economy into a recession in the third quarter of the year. To a very large extent. FORECAST The dollar challenged the US$0. Investors fear that should a recession be manufactured domestically. In this area.

However. have exerted enormous down pressures on the Canadian currency.16 billion Net Capital outflows from Canada From M&A: $45. net capital outflows of some $46 billion have worked against the Canadian dollar in global currency markets.46 billion • Trade surplus registers C$4. Just as the cross-border mergers and acquisitions account is not in favour of the dollar. the trade surplus has been slipping. the portfolio investment side remains convinced of the record performance in the Toronto Stock Exchange.2 billion in July falling below expectations • Gold and banking stocks perform well after strong growth in the second quarter • Hollinger seeks buyer for the Jerusalem Post • Of the “Big 5” banks only the Bank of Montreal has reported disappointing results for the quarter • TSE300 index begins to retreat as high tech stocks like Northern Telecom begin to experience consolidations • Cross border acquisition activity suppresses dollar as a record net capital outflow ensues CROSS BORDER M&A EFFECTS ON DOLLAR Canadian companies acquiring foreign companies: 5 Capital Outflows From Canada From M&A: $49. but remains positive overall.06 billion Foreign companies acquiring Canadian companies: 6 Capital Inflows to Canada From M&A: $3. Several large acquisitions involving telecoms group JDS Uniphase. with both the 153 .90 billion Net M&A Impact on the Canadian Dollar in Global Markets is Negative (-) Recently. while capital inflows from acquisitions activity have resulted in an inflow of only three billion dollars. Therefore.November/ December. 2000 • Royal Bank of Canada moves to acquire US regional securities house Dain Rauscher for $1.

can destabilise the Canadian dollar and cause it to drift downwards. Likewise. 154 . Any setback in the TSE300 index would require a substantial high technology meltdown.S.S.S. FORECAST The dollar is expected to regain some of the lost ground made over the past several months. would require a severe setback and correction in high technology stocks. The recent evidence in Canada can be called a perfect “case study” of how a mega-deal directed towards the U.G7 Books trade account and portfolio investment favouring the dollar. investors can see just how powerful the erratic acquisitions flows can be. and try to measure the risks of reversal in the portfolio investment accounts and the trade surplus. market.S. If we factor the acquisition effect out. as is currently being witnessed in the all-important auto parts and components sector. then what could be a possible scenario for the dollar? For one. and the risks for a setback can be considered as being quite high. This is where the Canadian trade surplus could really be hit hard. with a foreign group making a large play for a Canadian based asset.S. any reversal in the fortunes of the TSE300 stock market index. However. as the cross-border effect works itself out. The only danger from here is the impact of a protracted U. first. economy is inevitable. affecting the infrastructure-driven stocks such as Nortel Networks. They may have a reverse affect. economic slowdown is foremost on the minds of trade dependent manufacturers in Canada. This is not expected to occur so that foreign investors would be so turned off of the Toronto stock market. the risks of an imminent U. mega-deals of a cross-border nature are not expected to hit the levels seen over July and August in terms of capital outflows. a downturn in the U. To begin with. Both of these events would be evident in the U. economic slowdown on the all-vital component of Canadian exports.

The revolution in internet financing did not play a big role in Canada. which at this moment has suffered a serious setback. 155 .14 billion Net M&A Impact on the Canadian Dollar in Global Markets is Positive (+) Many analysts and business persons feel more optimistic over the prospects of the Canadian economy than they do about the US. Sure there were a few leading-edge high tech groups such as Ballard Power Systems and Nortel Networks.1 billion to foreign securities in first ten months setting a new record Cross Border M&A Effects on Dollar Canadian companies acquiring foreign companies: 2 Capital Outflows From Canada From M&A: $1. 2000 • Liberals propose a C$100 billion five year package of personal and corporate tax cuts • TD Bank moves to raise provisions against loans to the telecom and media sectors • TSE300 index challenges the 9. after going through very high burn rates in their cash reserves. as most successfully financed companies are now finding it enormously difficult to attract further funding.6424 nearing its alltime low of US$0.November/December.000 level after being as high as 11.87 billion Net Capital inflows to Canada From M&A: $0. The US was greatly buoyed by the dot.73 billion Foreign companies acquiring Canadian companies: 2 Capital Inflows to Canada From M&A: $1.7% in September • dollar dips to a two year low of US$0. but the venture capital scene was never in step with what was happening in the US.6311 Canadian investors send $39.000 • Nortel Networks loses some $200 million in market value since its peak in July 2000 • TSE300 index is left with a gain of just 5% for the year after peaking at revolution.

G7 Books Canada sends one-third of everything that it produces to its southern markets. leaving the country in a state of recession for at least four years after the US recovery took hold shortly after the Gulf War. Is the current setback in US growth a temporary development. stopping just short at US$0. The structural changes that were required for a regime of free trade and one that embraced new and more efficient technologies did not result in good economics in Canada until at least 1996.6424. not to mention the fact that Canadian financial investors sent some US$39. despite the record trade deficits that countries such as Canada contribute to regularly. FORECAST The dollar was on its way towards its all-time low of US$0. It also reflected the high long term capital outflow from merger and acquisition activity. The Canadian dollar’s recent weakness partly reflects this over-reliance on the US market. where the dollar is at historic highs in global currency markets.6311. any setback as is the case currently in the prospects for economic growth in the US. the dollar continues to languish at its all-time lows. Inevitably. as the downturn was deeper and much longer than in the US. Therefore. Dollar weakness will continue. or will it be broad and for a longer duration. A downturn is much more closer than what the current wisdom indicates and an ever weakening dollar is evidence of that. The recession in the early 1990s created real havoc in Canada. is that any given household income would have about thirty-five percent of its source determined by what was sold in the US.1 billion out of the country and into foreign securities for the first ten months of 2000. has very serious repercussions for the well-being of Canada. the US slowdown will lead to deteriorating conditions in Canada. Despite generally favourable economic and business conditions. This is the opposite from the evidence in the US. 156 . Another way of looking at its relationship with the US.

157 .

G7 Books .

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