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Ottawa brokers last-minute deal to free up short-term debt

$32-billion to be unlocked as foreign banks agree to credit lines, investor protection

From Monday's Globe and Mail

Intense last-minute talks between Ottawa and major foreign banks have yielded a deal that is expected to end a 16-month crisis and head off losses of as much as $25-billion for Canadian investors.

Sources said the federal government and the banks, which include Deutsche Bank AG and Merrill Lynch & Co., reached a weekend agreement that should mean the end of the asset-backed commercial paper (ABCP) meltdown that has locked up $32-billion of money belonging to investors big and small since August, 2007.

The deal, which comes after Ottawa and three provincial governments agreed to provide about $3.5-billion in credit lines, means that investors should get access to their money in January, barring any last-minute complications.

That would be a huge relief for investors ranging from pension fund Caisse de dépôt et placement du Québec, which is stuck with about $13-billion of the debt, to individual Canadians who had sunk their life savings into the investments because they were touted as a safe alternative to government bonds.

“This is a very happy Christmas for all of us,” said one person close to the talks.

The seizure of the ABCP market was one of the first tremors of the financial earthquake that would later rock the world. Investors fled the market on concern that the investments were tainted by exposure to U.S. subprime mortgages, leaving individuals and major financial institutions across the country holding paper they could not sell or redeem for cash.

The new agreement comes just ahead of the expiry of a deadline imposed by the foreign banks.

The fate of the restructuring was in the hands of the foreign banks after the federal government, along with Quebec, Alberta and Ontario, agreed Friday to provide lines of credit to enable the plan to proceed.

However, agreement from the banks wasn't guaranteed because the governments only agreed to put up less than half the $9.5-billion of the credit lines that the restructuring committee and the foreign banks were seeking.

The government drove a hard bargain, said one person familiar with the situation, getting the foreign banks to agree not only to go ahead with less credit than expected but also to agree to more concessions to protect investors from future market problems.

Sources said it is unlikely the credit lines will be tapped except in the case of a major debt market meltdown lasting beyond 2010.

Should that scenario happen, taxpayers would be on the hook to provide loans of as much as $3.5-billion, with the bulk of the money coming from Ottawa and Quebec.

The committee of investors that has been seeking a solution, under the leadership of veteran lawyer Purdy Crawford, still must seek a bankruptcy judge's final approval. That may come as soon as Monday or Tuesday, barring any complications, sources said.

That would mark the end of a tortured 16 months of talks between the foreign banks, big Canadian investors such as the Caisse, Canadian banks and government officials.

Time and again since August, 2007, just as the plan seemed ready to go ahead and investors would get their money back, fresh tumult in markets would derail it and force another round of negotiations.

The foreign banks, however, signalled last week that they would tolerate no more delays and that the terms of the restructuring had to be finalized, once and for all, in time for year-end.

That led to an intense push over the past two weeks to get the deal done, with much behind-the-scenes manoeuvring in the financial capitals of Toronto and New York, as well as the political capitals.

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