The Hook

When US Republicans doomed the American bank bailout on Monday, stocks fell on both sides of the border—777 on the Dow, 840 on the Toronto stock exchange.

This is scary stuff, and likely to have an impact on the US election. Polls show Americans tend to blame the Republicans for the financial crisis. Barack Obama and the Democrats are likely to gain.

But what about Canada?

On Monday afternoon, NDP leader Jack Layton called for an emergency party leaders’ meeting on Wednesday. Conservative leader Stephen Harper rejected the idea, saying the TV debates on Wednesday and Thursday would be the right venue for discussing the collapse. The Liberals’ Stephane Dion blamed Conservative mismanagement.

Our own financial experts, however, seem pretty optimistic about our ability to weather the downturn.

Dr. Andrey Pavlov, associate professor of finance at Simon Fraser University, says Canadian banks are solid and so are our mortgages. While banks are a bit exposed by investment in US institutions, Pavlov doesn’t think they’ll lose much.

So Canadian companies may suffer minor direct losses, and some deteriorating balance sheets. But Pavlov also sees a potential credit crunch affecting some companies.

“If you can’t borrow, you can’t buy,” he says. That means companies will have to forgo equipment purchases, and even day-to-day supplies.

Pavlov foresees volatility in the markets, with a rapid recovery once the Americans agree on a bailout package. He also sees a chance for Canadians to pick up some American bargains. Markets should come back up a little in the short term, he predicts. In the meantime, investors should hang on rather than sell.

Dr. Amir Rubin, an assistant professor of corporate finance and goverance, is also at SFU. He agrees with Pavlov that this is not the time to sell: “Many leave the market at the worst time,” he says.

Rubin isn’t nervous about the drop in the markets. Credit could be harder to get here, but he doesn’t see it as a major concern.

The major effect here, Rubin suggests, will be on real estate prices and on consumer purchases.

Neither expert wants to forecast political repercussions. “I hope emotions don’t get into this,” says Pavlov.

Still, anxious voters may draw emotional conclusions. Like the Americans, they may blame their government for the crash. Dion and Layton may exploit the moment even if they share the long-term optimism of professors Pavlov and Rubin.