Canadian Markets Fall Again on Credit Fears

TORONTO -- A reprieve won by Canadian financial markets early Wednesday proved short-lived as nervousness about credit markets re-emerged and at least one more trust warned that it couldn't find buyers for its debt.

"There is just no confidence right now. It is really hard to form a sustained rally when there is no confidence," said Julie Brough, assistant vice-president at Morgan Meighen & Associates.

"Right now, in the credit markets there are a lot of derivatives and packaged products that people just don't know where risks lie, and whose holding it, and that's making the financial system jittery," she told Reuters.

Toronto stocks, which started the day on a firmer footing, tumbled 156.56 points, or 1.1 percent to 13,086.06 by 3.30 p.m., on concerns that a credit crunch, fueled originally by defaults in the U.S. subprime mortgage market, could be taking hold in Canada.

The Canadian dollar edged lower to C$1.0779 to the U.S. dollar, or 92.77 U.S. cents, although it remained off its three-month low of C$1.0796 to the U.S. dollar, or 92.62 U.S. cents, touched early in the day.

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In the latest of a string of such announcements this week, the trustee of Canada's Ironstone Trust said it has been unable to roll its asset-backed commercial paper and extendible notes to fund the repayment of debt that is maturing.

Asset-backed commercial paper are debt instruments, backed by items such as home or auto loans, issued by entities to fund short-term financing needs.

Ironstone said it had asked Canadian Imperial Bank of Commerce, with which it has an arrangement, to provide it with liquidity to repay the maturing notes but the bank had declined.

Ironstone is one of 17 trusts rating agency DBRS said this week had asked for additional liquidity.

"It is safe to say that this issue is affecting everyone, it's only a matter of how much," said Jireh Wong, senior vice-president of Canadian structured finance at DBRS.

One bright spot on the Toronto Stock Exchange was Toronto-based Coventree Inc., which retraced some of this week's losses after the small structured-finance house said late on Tuesday it had managed to find buyers for C$600 million ($561 million) in asset-backed commercial paper.

Canada's C$116 billion market market for asset-backed commercial paper seized up on Monday after Coventree said it had been unable to place liquidity-backed paper and extendible paper.

Coventree's stock, which lost 80 percent of its value on Monday and Tuesday, was up 68 percent, or C$1.62, at C$3.99.

The Bank of Canada, responding to market fears, added a string of extra securities Wednesday to those it accepts as collateral for repurchase operations, and then pumped C$350 million into the market in a morning operation.

Its repo operations are designed to steer the overnight rate towards the central bank's 4.5 percent target. The London Interbank Overnight Rate, a guide to Canada's rates, hit a six-year high of 5.342 percent at the 11 a.m. fixing, well above the target rate.

Analysts welcomed the central bank's expanded list, which includes mortgage bonds and provincial debt, as well as some commercial paper and short-term municipal paper. It does not include the asset-backed commercial paper at the center of the storm.

J.P. Morgan analyst Ted Carmichael said financing delays could slow economic growth and put central bank interest rate hikes on hold indefinitely.

"As long as the commercial paper market remains seized up, the Bank of Canada is highly unlikely to raise the policy rate on the Sept. 5 decision date," he wrote in a note to clients.

"Should the current market situation persist, or worsen, through Aug. 24, the JPMorgan BoC rate forecast will be changed to 'on hold indefinitely'."

Until the recent turmoil most analysts had expected the Bank of Canada to raise interest rates on Sept. 5 to cool the economy and keep inflation under control.

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