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Canadian banks raise cash as debt feud drags on
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The Globe and Mail- Facing a political stalemate in the United States that has the potential to cause upheaval in global financial markets, Canadian banks are stockpiling cash.
In the course of just eight days, four of Canada’s largest banks have tapped investors for almost $6-billion in new debt. That total is about three times as much as the Big Six would typically raise in one month, highlighting their desire to raise money at a time when borrowing is cheap and foreign investors crave Canadian-dollar investments.
Financial markets have been on edge all week as Republicans and Democrats in the U.S. wrangle over raising the country’s debt limit. U.S. Treasury Secretary Timothy Geithner has warned that if the limit is not raised by Aug. 2, the government would not have enough money to meet its obligations. But so far the two main parties have not been able to strike a deal, causing equity markets to wobble and the U.S. dollar to decline.
Investors have been seeking safer havens amid the turmoil, including gold, the Swiss franc and the Canadian dollar. That is making it cheaper for Canadian banks to borrow, as investors are willing to pour money into the biggest financial institutions, even though these firms could take a major hit if a debt crisis breaks out.
Toronto-Dominion Bank’s (TD-T77.090.090.12%) latest $1.75-billion debt deal on Wednesday tied Royal Bank of Canada’s record for the largest domestic bank financing. And it wasn’t the only deal investors bought: Earlier in the day, Bank of Montreal (BMO-T60.63-0.75-1.22%) raised $1.3-billion that was quickly scooped up by investors.
The banks are more than happy to take the funds. Bond yields have plummeted since peaking in April, sending the five-year government yield down to 2.15 per cent from 2.9 per cent. Assuming no changes to the banks’ funding spreads over government bonds, that plunge would save TD $13-million a year in annual interest costs on its $1.75-billion issue. Over the five-year life of the new deposit notes, that equates to $65-million in savings
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