Canadian Finance Minister Jim Flaherty said the program will force the government to issue additional debt, but that it won't run Canada into deficit and could eventually turn a profit.

If the government issues $25 billion in debt through fixed coupon bonds, which is likely, it would increase the supply by 10% and total Canadian dollar debt would rise above $400 billion.

The Canada Mortgage and Housing Corporation, a government-owned corporation, will run the program. On Friday, CMHC officials said the first purchases of $5 billion in mortgage-backed securities will be conducted through a reverse auction on Oct. 16. A summary of the auction results will be made available on CMHC's website on the day of the auction without identifying the issuers.

Banks will bid in the auction based on what yield they are willing to pay the CMHC. The plan and auction process are similar to the U.S. $700 billion Troubled Asset Relief Program, which won't be implemented until the end of the month.

Flaherty said the government has been considering the program "for months."

Flaherty said it is not a bank bailout because it involves buying mortgages that are already insured and because it does not involve the government receiving an equity stake in exchange for buying the unwanted assets.

Flaherty said the mortgages will be held to maturity and are likely to make money. He didn't indicate how the government will handle mortgages it receives that fall into default. The CMHC said only "high-quality" assets will be purchased, unlike the U.S. which will take distressed assets.

"These securities will earn a rate of return for the government that is well above the government's own cost of borrowing," a statement from the Department of Finance said.

By Adam Button, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it

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