The Oil Drum: Canada

And that could all come crahing down on Canada.

Europe holds key to credit crisis
_{EU banks have much to gain if commercial paper unwinds}

The future for the so-called made-in-Canada solution to the freeze in the $40-billion asset-backed commercial paper market lies not in this country, but in Europe.

A major chunk of the illiquid notes are backed by bets around interest rates called credit default swaps.

The high degree of leverage and the recent credit tightening means the parties on the other sides of the deals have everything to gain if the issuers of the commercial paper are forced into default and the trades are unwound, sources said.

"If the issuers were forced into bankruptcy, the swap providers would have priority over anybody else," said one analyst who asked not to be named. "They could force a fire sale [of the conduit assets.]"

In other words, the owners of the commercial paper could end up facing huge losses.

The swap counterparties include a group of European banks, some of whom are also part of the consortium of financial institutions that unveiled the restructuring plan back on Aug. 16.

Many of the proponents including the Caisse have much to lose if the plan fails. The investor committee chaired by lawyer Purdy Crawford certainly want it to work. But some players, such as the ones on the other side of the credit default swaps, could potentially find their interests better served if the plan collapses.

"The foxes are in the henhouse," said a senior official at a company that owns more than $10-million of ABCP. "What Purdy [Crawford] is trying to do is keep the foxes in a corner."