MNI EXCLUSIVE: Canada Could Have Tapped FX Reserves In Crisis

Canada's finance department laid out options for accessing cash in May in case regular debt auctions became doubtful, like tapping emergency funds held at the central bank or dipping into foreign reserves, according to a briefing document obtained by MNI following a freedom-of-information request.

"Should the government anticipate difficulties in issuing debt in time and cash balances drop too low to meet financial requirements, additional contingency measures may be considered," said the eight-page document addressed to then-Finance Minister Bill Morneau from Paul Rochon, the department's top civil servant.

"These include the Prudential Liquidity Plan assets, which include a $20 billion demand deposit at the BoC… and up to $85 billion of additional liquidity from foreign reserves,…." The prudential account was set up after the global financial crisis to cover at least one month's worth of cash needs in case of a funding disruption.

Parts of that sentence about prudential assets and other sections were blanked out under exemptions to the freedom of information law used to obtain the document, such as protecting national economic interests, advice to government and relations with provinces.

The department, the finance minister's office and the central bank offered no comments on the document in reply to requests MNI sent early Tuesday morning.

"Due to the unprecedented size of the borrowing program, we have taken steps to manage pressures on funding markets," such as modifying auction rules to facilitate dealer participation, the report said. "Treasury bill and bond auction results so far reflect strong demand for Government of Canada securities in line with historical results."

FLEXIBILITY TO FUND

While there were no signs of failed government debt sales amid a record CAD343 billion deficit estimated for this fiscal year, the Bank of Canada moved to buy at least CAD5 billion a week in federal bonds to calm markets, recently slowing the pace to at least CAD4 billion of bonds. The central bank also boosted participation in other debt markets, and Morneau shifted federal bond sales to longer maturities to cut down on rollover risk and lock in low interest rates.

"The BoC and the Department are working closely to ensure the Government has sufficient cash balances to cover expected outflows and some flexibility to fund additional programs as further decisions are taken," the memo said.

Then BOC Governor Stephen Poloz said May 25 the risk of a "giant deflationary crater" justified unprecedented asset purchases amid Covid-19. "A firefighter has never been criticized for using too much water," he said at the time. Tiff Macklem, who took over in June, has wound down several other facilities as markets recovered.

The finance department memo addressed funding for the week of May 11 and noted the government had just announced a wage subsidy extension, a program to help financing at large employers and special payments to seniors. The document was marked "for information only."