``If the government became the day-to-day underwriter of market risk in commercial securities markets, that's a bottomless pit,'' Harper said in an interview in Ottawa. A government rescue wouldn't be ``healthy for the long-term growth of the Canadian economy.''
Harper's refusal to shore up the market for asset-backed commercial paper -- 30- to 90-day securities backed by car loans, credit card debts and mortgages -- leaves holders at the mercy of the country's biggest banks. Some banks have already expressed reluctance to provide support and are resisting pressure from the central bank.
``If the Canadian chartered banks don't go along with what they are apparently being promoted to do by the Bank of Canada, then what? Then we have a potential financial and economic problem,'' said Dale Orr, managing director of Canadian research in Toronto for Global Insight, a Lexington, Massachusetts-based economic forecasting firm.
The Canadian commercial-paper crisis comes as the nation's economy is weakening. Harper said he's worried that a U.S. slowdown will exacerbate matters, leaving little room to stimulate the economy with spending or tax cuts in his next annual budget proposal, due in February or March.
Canada's market for commercial paper sold by non-bank dealers ground to a halt in August after Coventree Inc. and other sellers failed to renew maturing debt. They couldn't find enough new buyers amid concerns that about 9 percent of the debt is backed by U.S. subprime loans, which are plagued by record default rates. Foreign banks refused to provide backup financing, freezing the market.
``I don't think politicians, certainly not in Canada, have fully grasped the severity of what is going on,'' said Hans Black, chairman of Interinvest Consulting Corp. in Montreal, which manages about $2.8 billion. ``We are at a very serious juncture, and there's a serious risk of unraveling.''
Harper, 48, said commercial-paper buyers must accept responsibility for their investments. Holders of the debt, which may be worth as little as 50 percent of face value, include Caisse de Depot et Placement du Quebec, Canada's biggest pension-fund manager, Barrick Gold Corp. and Baffinland Iron Mines Corp.
``When people undertake commercial transactions, they have to be prepared to assess and evaluate risks,'' Harper said on Dec. 18, sitting on a living room lounge chair in his residence overlooking the Ottawa River.
Flaherty, Dodge Helping
An investors' group led by Toronto lawyer Purdy Crawford has been struggling to cut a deal to swap the debt for longer- term, higher-interest notes to attract more buyers. The group hasn't been able to persuade Canada's five biggest banks to guarantee the notes to prevent a price plunge after they start trading. Finance Minister Jim Flaherty and Bank of Canada Governor David Dodge have joined the talks to urge the banks to support the restructuring.
``This government has been, through its agencies and arms such as the Bank of Canada, fully apprised of all the discussions,'' Harper said. ``It would be very unlikely for a Conservative government to become the backer of commercial paper. That would run pretty strongly against our overall market-oriented economic policy.''
Less Fiscal Room
Harper, whose Conservative Party government may face voters in 2008, also said he expects a ``stand-pat fiscal policy'' next year, as the slumping U.S. economy further dampens Canadian exporters' main market.
``It's impossible to see how that doesn't affect this country in some way,'' Harper said. ``As we approach our budget, we will not be suddenly proclaiming oodles of fiscal room.''
That means the budget won't include ``long-term spending measures'' or big tax cuts, he said. Delivering the capital- gains tax break he promised in his 2005-06 campaign also is ``unlikely'' next year, Harper said.
``We will be doing what households and businesses do when things are uncertain: We will be acting in a stable and cautious manner and we will be focusing on paying down the debt,'' he said.
Canada sends more than three-quarters of its exports to the U.S. The American housing slump, combined with a 17 percent appreciation in the Canadian dollar this year, has eroded U.S. demand for lumber and cars, two of Canada's top five exports.
The Finance Department cut its 2008 growth forecast to 2.4 percent from 2.9 percent, and the central bank cut interest rates for the first time in more than three years on Dec. 4.
Canada already has taken steps to protect its economy, Harper said, citing a C$60 billion ($60 billion), five-year tax- cut package enacted this month.
``We did all of our major tax initiatives early to secure domestic demand and create a good long-term business climate,'' Harper said.
In another matter, Harper wouldn't rule out selling all or part of state-owned Atomic Energy of Canada Ltd., which makes radioactive material for cancer screenings. A safety-related shutdown of its reactor from Nov. 18 until Dec. 16 caused cancer-treatment delays in North America.