Canada can hardly claim to have come through the last 12 months unscathed. A projected 2.5% decline in real gross domestic product this year will mark its worst recession since 1982.
The stimulus needed to fight the downturn has also shaken the federal governments finances, with a record budget deficit of C$50bn ($47bn) expected for this fiscal year.
For a country that had until 2008 posted 11 straight annual surpluses, that is sobering.
But if any nation can claim to have had a good recession, it is Canada. Years of fiscal prudence by successive governments meant that it entered the crisis in a stronger position than most other industrialised countries. While Canadas increased funding needs will prompt it to issue a record C$100bn of bonds this fiscal year (ending on March 31, 2010), its debt to GDP ratio is likely to rise to just 32.5%.
By contrast, the UK had debt equivalent to 58% of GDP at the end of August (and could rise to 80%, say some analysts), while the USs debt is approaching 70%.
Analysts are also confident that the governments finances can soon be repaired. "Compared with previous recessions, theyve tried to maintain fiscal discipline," says Eric Beauchemin, head of public finance at rating agency DBRS in Toronto.
"Most of the extra spending is understood to be one-off. Much of it is infrastructure-related and will only last for a year or two, before going back to normal levels."
Typifying this measured approach, Canadas main response to the crisis was the Insured Mortgage Purchase Programme, in which federal bonds were used to buy pools of mortgage backed securities from financial institutions.
The reverse auctions which added no risk to the Canadian taxpayer, since all the MBS had already been insured by the Canadian Housing & Mortgage Corp (CMHC) saw the government buy about C$60bn of securities between October 2008 and July.
"It was a great piece of policy that achieved so many objectives in one fell swoop," says David Fry, head of global markets at Deutsche Bank Canada in Toronto. "It liquefied the banking system, stabilised the mortgage sector and set a floor for the housing market."
North of the border prudence
Canada is thus in an envious position. Its economy is projected to grow 2% in 2010, more than any other G7 country, according to research by CIBC. House prices have only fallen 6% from their peak, a tiny drop compared to a collapse of about 30% in the US.
But the performance of its banks is perhaps the best example of Canadas resilience. While they were undoubtedly helped by the mortgage programme, the government has not had to pump equity into any of them and none have turned to government-guaranteed debt.
Given the sharp contrast with their own financial institutions, these were achievements that not even the US could ignore. Barack Obama, the US president, visiting Ottawa in February, declared that Canada had "shown itself to be a pretty good manager of the financial system in ways that we havent always been".Canadas capital markets have fed off this robust performance. The debt markets inevitably suffered after Lehman Brothers collapse last year, with spreads gapping in the last four months of 2008 (see chart). But the fact they barely shut within about two weeks banks and provinces were issuing senior unsecured paper, while subordinated bank debt even reappeared before the end of the year spoke volumes about Canadians faith in their domestic borrowers.
Rise of retail investors
Since then the story has been even rosier, with debt markets improving throughout 2009. A flood of retail investors turning to fixed income for the first time has even led to over C$11bn of issuance from borrowers rated triple-B or lower, somewhat surprising for a country known for its conservative investor base.
"The markets are open to a broader group of credits that ever before," says Peter Marchant, managing director, debt capital markets, at Bank of Montreal in Toronto.
Equity capital markets have picked up, too. Claymore Golds C$430m initial public offering in late May was Canadas first major debut since late 2007. It was soon followed by IPOs for C$945m from insurer Genworth MI Canada and C$500m from Capital Power Corp, a utility.
Public sector borrowers have benefited greatly from the state of the debt markets. Taking advantage of traditional bond investors preference for highly rated credits, they issued over C$60bn of bonds in the first half of the year, a level not far behind the C$77bn printed in all of 2008.
The provinces have aggressively tapped markets, the downturn having increased their borrowing requirements from about C$60bn in 2008/2009 to C$70bn this year, according to DBRS.
Ontario, typically the busiest provincial issuer, has seen its needs shoot up to C$40bn, partly as a result of a bailout of its motor industry.
Collectively, the provinces had completed about half their borrowing programmes by the beginning of September. But many, such as Quebec, could pre-fund next years budgets. Luckily for them, domestic demand does not look like waning.
The federal government and CMHC have also met with little trouble, the latter being able to print three deals of C$7bn or more between January and mid-September.
All the governments bond auctions have been fully covered, despite its record borrowing. As such, it says it has no need to re-introduce syndicated deals or issue abroad to fund its deficit, two strategies that have been forced on some European sovereigns.
The effects of Canadas economic strength have been demonstrated even more clearly in foreign markets, where demand for Canadian debt has been spectacular. "The maple leaf allows you to walk through any investors door," says Alex Corley-Smith, managing director, sovereign, supranational and agency origination, at BNP Paribas in New York.
"During the crisis Canada has been on the front pages of the worlds press as a shining example of the country that got it right."
The extent to which investors crave Canadian paper was shown when the sovereign attracted $15.3bn of orders for its $3bn five year deal in early September, its first global bond for 10 years.
The deal, which like all Canadas international bonds, funded its foreign exchange reserves rather than its deficit, was priced at 15bp under Libor, the tightest spread of any US dollar issuer this year.
"The fact youve had a very successful deal for the sovereign is great news for all Canadian borrowers," says Eric Giroux, head of Canadian debt capital markets at Bank of America Merrill Lynch in Toronto. "It reminds investors that throughout the crisis the country has held its own."
One of the first issuers to build on this deal was Export Development Canada, the government agency that provides exporters with financing and insurance. It priced a $1bn three year deal in mid-September at 16bp through mid-swaps, 6bp tighter than what the European Investment Bank, one of the worlds most frequent dollar issuers, paid for the same maturity just two weeks before.
Foreign markets have also been receptive to the provinces. Ontario, which will issue up to 50% of this years programme abroad, printed a $4bn five year deal in June, its biggest transaction ever.
Smaller borrowers, including British Columbia, Manitoba and New Brunswick, have tapped the Swiss franc market.
Canadian banks stay at home
Canadian banks, however, have been conspicuous only for their absence in the last 12 months. Despite their strength both Royal Bank of Canada and Toronto-Dominion have triple-A ratings they were unable to issue cost-effective senior unsecured deals in the first half of the year given that they would have been competing against a glut of government-guaranteed supply from US and European banks.
Even now, basis swaps back to Canadian dollars and new issue pricing are too wide for them to contemplate foreign issuance, says Corley-Smith, especially given the spread they can attain at home.
The banks have also been quiet in their domestic market. New issue volumes have roughly halved from the same period last year. But rather than being a sign of weakness, this reflects the fact they have not needed to tap debt markets as much as they have in recent years, especially given their access to the mortgage programme and other sources of financing.
"We havent needed a lot of funding in the wholesale markets," says John van Boxmeer, vice president, treasury and balance sheet management, at TD in Toronto.
"The deposit growth has been quite strong. For TD in particular, our US operations have been a great deposit gatherer. So we continue to fund most of our operations with our retail and commercial deposit base."
Canadas non-bank corporate borrowers took a while to catch up with the rest of the market. Issuance boomed in the US and Europe at the start of the year. But Canada was much more muted in the first quarter, during which only about C$6bn of such debt was printed.
The story then changed, however, and by the end of June C$25bn of deals had come to the market and spreads had tightened by about 250bp-350bp.
Even the high yield market was active, with C$850m of paper issued by the beginning of September. Bankers admit the overall speculative grade volumes are low, especially compared to those in the US. But most are confident that the market will continue to grow.
Public sector debts
Not all parts of Canadas capital markets are glowing, however. Maple issuance, which made up about 25%-30% of corporate supply in 2006 and 2007, ground to a halt in the second half of last year and still shows little sign of life.
As most traditional Maple borrowers are not in need of Canadian dollars, a revival is unlikely until swap spreads start to work in their favour again, says Andrew Fleming, a senior partner at law firm Ogilvy Renault in Toronto.
The securitisation market is also moribund. Outstanding asset backed commercial paper totals just C$40bn, barely a third of its peak in 2006. Banks, with ample sources of funding, are hardly desperate to start issuing ABS again.
But other businesses are suffering. The governments attempt to kick-start the market via the Canadian Secured Credit Facility under which it plans to buy C$12bn of ABS backed by vehicle and equipment loans has proved ineffectual so far.
Mergers and acquisitions have yet to pick up, partly as a result of tough conditions in the loan market. But bankers are confident, given the strength of bond and equity markets, that lenders will soon be more willing to provide bridge financing for M&A.
Perhaps a bigger worry, however, is the state of public sector finances. Canadas triple-A rating will likely remain intact. But the provinces could see theirs come under pressure, especially if a stalled economic recovery prevents them from reducing their deficits quickly.
Exports, meanwhile, are vulnerable to a strong Canadian dollar and protectionism or a slow recovery in the US by far Canadas biggest trading partner.