Remarks by: Eric Siegel
President and Chief Executive Officer
To the: Vancouver Board of Trade
Vancouver - June 17, 2009 

Good afternoon.  It’s a pleasure to be here with you today.

I welcome this opportunity to speak to you about:

• the unprecedented challenges currently facing our economy; 
• what EDC is doing to help Canadian businesses weather the storm; and 
• what I believe Canada has to offer the world in terms of a viable model for the future of our financial systems. 

Today, as I’m sure everyone in this room is acutely aware, trade is slowing around the globe – one more casualty of the global financial crisis. 

Here in British Columbia, exports have been declining for the last two years or so, as the difficulties facing the U.S. housing sector take their toll on the forestry industry, and collapsing commodity prices slow markets.

The World Trade Organization predicted back in March that global trade would decline nine percent this year, but so far it seems as though even that bleak prediction may have been somewhat optimistic.  EDC’s Chief Economist Peter Hall is forecasting a 22 per cent decline this year in Canadian exports alone.

As a trading nation, Canada should be concerned by this – trade maintains one of every five jobs in this country.  Exports generate 25 per cent of our income, and when combined with imports represent 70 per cent of our GDP.

A recent McKinsey survey of executives around the world found that most business leaders expect globalization – including trade, international capital and labour flows – to continue to slow in the near term.  But looking five years ahead, a significant majority believes that the free movement of goods, services, labour and capital will rebound.  

This gives us a window to prepare for the next cycle of global growth, and I believe that Canada is well-positioned to be among the last in and the first out of this recession.

That may seem like wishful thinking, in a climate where no one wants to make predictions, no matter how vague. 

There’s no question we are entering an era where we will see tremendous change.  The visibility is still low on the outcome of this economic slump – no one can predict when or how the economy will get back on track.

On a positive note, EDC’s new Trade Confidence Index numbers, released yesterday, show the biggest single increase since the post 9/11 rebound – up to 68.5 from a record low of 61.

But even though a few glimmers of hope are appearing, experience suggests that we are still seeing the fall-out – the domino effect of the credit crisis is still working its way through the system in the form of defaults on corporate loans, collapsing trade, growing unemployment and a continued lack of consumer and business confidence.

One indicator that we are not out of the woods just yet is Moody’s recent revision of its U.S. speculative grade bond default forecast to 13.5 per cent, up from 4.5 per cent at the end of 2008.  For comparison sake, the all-time high for this rate was 15.9 per cent in the second quarter of 1933, the height of the Great Depression.

This credit crisis is one genie that can’t be put back in the bottle.  One of the fundamentals of world trade – the easy flow of capital– has undergone a crisis of confidence that will extend well beyond the economic recovery. 

As a result, I believe that global financing practices will never be quite the same again, even after this recession.  The credit crisis will mean a change to the way the global economy does business – there will be a new status quo, not a return to the way things used to be. 

This credit crunch showed the world what happens when market freedom and proper oversight are not held in balance.

It should stand to reason that banks will naturally be more risk averse in the medium-term, given the scale on which governments have had to intervene. They will need to rebuild their balance sheets and the confidence of their investors, and that will lead to more conservative behaviour, leaving gaps in the credit market that will require more involvement from export credit agencies and multi-lateral financial institutions.

The world is witnessing an unprecedented shift in the role of government and government-owned organizations in our financial systems – as a recent special report in The Economist put it, “the contract between society and banks will get stricter.” 

The nationalization of banks in Britain, and the U.S. government’s significant capital investment in the banks there will entail a new level of oversight for the world’s finances.

The game is changing, and there will be more scrutiny to ensure the boundary between appropriate return on risk and pure opportunism is not so easily crossed.

It’s not a question of the markets being side-lined – we need the markets.  But we need to determine how government and the markets can work better together. 

This crisis is forcing the world towards a model based on greater cooperation.  And that’s a good thing, because, as we’ve seen in Canada, it’s a model that works.

In fact, I believe that one of the outcomes of the economic turmoil we’ve seen in the past year will be that the rest of the world will be seeking to build institutions like the ones that we have in Canada right now.

Canada’s fiscal foundations were on sound footing going into this turmoil.  The Government of Canada confronted the recession with the best fiscal position of the G7 nations.  It had been running balanced budgets for a number of years, helping to pay down public debt and improve our country’s credit rating. 

Our strong national credit rating in turn helped to keep interest rates low, and provided a back-stop to our banking system, since one of the factors that rating agencies look at in their evaluation of financial institutions is how likely their national government would be to step in during times of trouble.

But that was only one factor in the overall strength of Canada’s financial institutions.  Throughout the past 15 years of strong economic growth, Canada’s banking system has been the subject of much debate.  There has often been a perception that Canada’s banks were too conservative, too risk-averse, and fettered by too much red tape and regulation.

But our banking system has recently become the toast of the financial community. 

It was recently ranked the soundest in the world by the World Economic Forum.  And the IMF reported that Canada’s financial sector is “among the most highly developed in the world,” with “sophisticated” oversight systems in place.

All five major Canadian chartered banks are currently ranked among the top 50 in the world, and among the top 12 in North America.  And, perhaps most impressively, of the seven financial institutions worldwide to earn a triple-A rating from Moody’s, two – the Royal Bank of Canada and the Toronto Dominion Bank – are Canadian.

To see how the Canadian model of more cooperation between the private sector banks and government agencies has worked, let’s briefly compare the mortgage sectors in Canada and the U.S.

Canada has avoided the problems with sub-prime mortgages that have been so disruptive to the U.S. banking system.  There are a number of reasons for this, but one has to do with the interaction between the public and private sectors in Canada’s mortgage market.

In Canada, a large percentage of Canadian home mortgages, and all mortgages worth more than 80 per cent of the property value, must be insured. The vast majority of this business is carried out by the Canada Mortgage and Housing Corporation – a Crown corporation like EDC. 

This is quite different from the way in which U.S. housing finance giants Fannie Mae and Freddie Mac operated.  The move away from government ownership encouraged a growing focus on maximizing profitability over the public good.  We’ve seen the result.

In hindsight, some have argued that the problems these agencies now face could have been avoided had they performed a similar role to CMHC, guaranteeing mortgages but not buying them.

Having insurance on these mortgages means that the risk rating attached to these mortgages is zero.  This enabled the Canadian Government to buy several billion dollars worth of these insured mortgages without transferring risk to the taxpayer, adding essential liquidity to the banking system.

So why am I, as President of EDC, talking to you about the mortgage market and CMHC? 

Because this is a great example of the Canadian model – government and the private sector complementing each other, working together and achieving great results – and that’s what EDC is all about.

That’s the EDC model.

In fact, the Canadian government is building its plan for Canada’s recovery around the model of enhanced cooperation between the private sector and government agencies and Crowns. And EDC is an important part of this. 

As I’m sure most of you are aware, the Government of Canada has expanded our mandate and financial capacity, giving us greater flexibility to expand our core business – developing Canada’s international trade – and allowing us to provide financing and insurance services in the domestic market for a two-year period. 

As a result, we can now facilitate more of your international business, while also being able to apply our insurance, financing and bonding solutions to a wide range of Canadian domestic activities. 

Given EDC’s strong financial position, expertise with financial tools and integrated relationships with private-sector financial institutions, we were a natural fit to help the government address gaps in the domestic credit market.

But the Government was explicit in its direction of how these new powers should be applied: supplement the private sector, don’t supplant it.

That approach makes sense for EDC – our role is to share risks and bring additional capacity to the market.  And the fastest and most efficient way to get credit into the hands of Canadian businesses is to partner with banks, insurance and surety companies.  They know the market, and they know you and your customers.

Let me give you a concrete example of how we are carrying out these new responsibilities and what it will mean to Canadian companies.

Currently, tighter credit requirements have made it difficult for many banks, insurance or surety companies to provide new insurance, loans or bonds. But if EDC can reinsure the insurance or bond, or guarantee the loan, we share the risk and, in doing so, give the private sector players the extra capacity to take on more risk and new customers.

Before the traditional credit markets dried up, a lot of companies didn’t insure their receivables.  Now, they are realizing that having uninsured receivables is risking their capacity to pursue other transactions.  Moreover, the banks want to see better use of risk management tools to support credit advances. 

In addition to its core business of insuring export receivables, here in the domestic market EDC is now providing up to $1 billion in reinsurance capacity to credit insurance providers.  If an insurer is prepared to insure the receivables of a company, but is lacking capacity, they can now come to EDC and we will reinsure up to 50 per cent of the total. 

On a large scale, that means our $1 billion in reinsurance capacity could generate up to $2 billion at any one time out in the market place.  Given the average duration of a receivable of 30 to 90 days, that could mean an additional credit insurance capacity of $4 billion or more.

For the individual company with the insured receivables, it means a greater chance of success when they go back to the bank for additional loans for working capital, because the risk attached to the receivable is shared with EDC.

And, in addition to this $1 billion in reinsurance capacity, we will also facilitate up to $1 billion in new domestic contract guarantees in 2009 in partnership with banks as well as $1 billion in domestic surety credit in 2009 through an agreement with Canada’s surety industry.  This $3 billion in new commitments on our part will be leveraged many times over in the market.

So you can see that by complementing the role of the private sector and adhering to responsible risk management practices, EDC is helping to create credit and add capacity throughout the financial system. We are also filling gaps left by the banking system as it regroups, given that many financial institutions are compelled to be more selective in the lines of business they pursue, including trade finance. 

I will say it again: we are supplementing what the private financial sector can do, not supplanting it.

With these new domestic powers, EDC is building on the strong ties with private-sector financial institutions generated through our core international business.  The strength of these relationships is illustrated by the fact that EDC’s business activity conducted in partnership with banks climbed 20 per cent last year to almost 4,500 deals valued at more than $14 billion.

Through our close relationship with the private sector, EDC is building capacity and skills that will be with us far beyond Canada’s recovery from this recession. Our challenge over the next two years will be to optimize our relationship with the banking sector, learn from the experience and apply it going forward.

This model of business is a key feature that distinguishes EDC from other export credit agencies, or ECAs, around the world. 

Take for example Ex-Im Bank, the U.S. export credit agency.  While EDC is playing a key role in helping to position Canadian businesses for economic recovery, Ex-Im Bank has been conspicuously absent from the U.S. government’s recovery efforts.  Its role is simply as lender of last resort, backed by taxpayers. 

In Europe, ECAs are in a similar position: they are not structured in such as way as to have the flexibility to offer a wide-range of financing solutions.  They only offer guarantees, without the ability to provide funding.

That model works if you presume that financing will never be a problem, just like the markets presumed liquidity would never be a problem.  But it’s far too limiting when traditional credit sources are running dry. As a result, many European governments are scrambling to create funding and other programs to address market gaps.

EDC, on the other hand, has tremendous flexibility and adaptability, thanks to its diverse range of programs and financing options, which allows us to take into account the realities of trade today. 

Companies are operating in an increasingly integrated global marketplace, where being competitive means importing more to export more, lowering costs and increasing productivity, diversifying supply chains, and investing in foreign markets.  And EDC is well-positioned to provide assistance in all of those areas.

Like many other ECAs, EDC was established after the Second World War to help the Canadian economy find its footing.  But the government showed tremendous foresight in the model used to create EDC. While much has changed in the global marketplace, the principles instilled in EDC from its creation have served us well: commercial viability, prudent fiscal management and social responsibility. 

This balance allowed the Government to expand the scope of the corporation, and allowed us to adapt in the current circumstance, to fill a gap left by the private-sector.  It’s an unusual role for us, but one for which we were ready.  And, as a Globe and Mail editorial from March noted, “an extraordinary use of existing machinery is wise in hard times.”

Among our ECA peers, EDC leads the pack in terms of the number of customers and the volume of their sales and investments we support.  We have used the $1.3 billion in share capital provided by the Government since our founding to support more than $800 billion in business.

Several years ago, I was told by a foreign colleague that EDC is known as “the gold standard of ECAs.”  Since then, EDC has hosted visitors from around the world who are seeking to emulate the success of the Canadian model. 

Our influence is spreading:

• In Europe, Italy’s SACE and Belgium’s ONDD have adopted models similar to EDC; and
• the majority of ECAs in emerging markets like China, India, and South Africa seek to copy the EDC model. 

Given the increasing integration between public-sector stability and private-sector innovation, we are likely to start seeing more established ECAs adopting components of EDC’s "hybrid" model, offering a broader suite of insurance and financing solutions to complement those offered by the private sector. 

Already, corporations and banks are turning more to export credit agencies and multilateral financial institutions to fulfill their funding and risk management needs.

Those agencies need a model that works – and the Canadian model, the EDC model, works.

The success of EDC is one of several examples of Canada having struck the right balance between public and private. Our financial system – from banking to mortgages to export development – is a well-positioned hybrid. 

Let me put it in a slightly more colorful way:

Canada is the Prius of the financial world, at a time when other nations are looking to ditch their gas-guzzling SUVs.

Canada’s financial institutions, including EDC, have a lot to offer the world in terms of a viable model to ensure that credit markets have the capacity they need, and businesses can continue to grow and diversify, all within a framework of responsible risk and oversight.   

As I said earlier today, I believe Canada is well positioned to be the last in and the first out of this recession.

Canada was able to ramp up its response to the recession faster than other nations because we already had the institutions and partnerships in place. We didn’t have to start from scratch.  We are already there!

Our sound footing going in to the downturn, the stability of our banking system and mortgage markets, the Government’s ability to add liquidity to the credit markets and the work our businesses have done to diversify their markets will all help Canadian companies capitalize on the eventual recovery faster than in previous downturns, and faster than their competitors in other countries.

But we still need to do more. . .

Over the last several years of steady global economic growth, Canadian companies began to increase their investment abroad and diversify their business to take advantage of low costs and strong growth in emerging markets. 

From a global perspective, the percentage of total world foreign investment that Canada attracts has slid by a third over the past 15 years.  By 30 per cent!

Even before the recession, we were lagging the G-7 in trade penetration, and that’s a big problem for a trade-dependent nation like Canada. 

As well, Canadian direct investment abroad is comparatively low in emerging markets – and let’s not forget, those are the markets where much of the growth will be happening in the next decade and beyond.

Now, I know you’ve heard this before, but Canadian businesses must not “let this crisis go to waste.”

We need to invest, train, plan and prepare to make sure we are in a position not just to ride the coat-tails of global recovery, but to lead it.

Perhaps the silver lining for Canadian business in the clouds of the current economic situation is that more and more of you are making use of the full range of financial tools at your disposal, including those offered by EDC.  Our results so far this year underscore something we always believed at EDC – while our services are needed in good times, they are needed even more when times are difficult.

These tough times have brought hundreds of new customers to EDC, and I am confident that, having experienced the value we can bring, they will continue to use our services.  Together, we can show the world Canada’s true potential.

Thank you.