Bloomberg News

Quebec Must Use Low Interest Rates to Pare Debt, Economists Say

November 25, 2011

Nov. 24 (Bloomberg) -- Quebec must take advantage of low interest rates to reduce its debt burden at a time when global investors are driving up borrowing costs for other indebted governments, Canada’s top bank economists said.

At about 63 percent of gross domestic product, Quebec’s debt burden is the highest in Canada, according to Oct. 7 estimates by debt-rating company DBRS Ltd. Ontario, the country’s most-populous province, has a debt-to-GDP ratio of about 39 percent. Quebec finance minister Raymond Bachand last month reiterated a goal to balance the province’s budget by fiscal 2013-14 -- four years earlier than Ontario.

“Zero balance isn’t enough” when the debt burden is as high as Quebec’s, Craig Wright, chief economist at Royal Bank of Canada, told reporters at a briefing last night in Montreal.

Germany failed to get bids for 35 percent of the 10-year bonds offered for sale yesterday, propelling borrowing costs in Europe higher on concern the region’s sovereign debt crisis is driving away investors. Ten-year Italian yields approached 7 percent yesterday, the point that drove Greece, Ireland and Portugal to request bailouts, while comparable Spanish bonds reached 6.65 percent. Bank of Canada Governor Mark Carney said yesterday the situation in Europe “appears barely contained.”

Wright spoke at a panel of chief economists hosted by the C.D. Howe Institute, a non-partisan research group, along with Warren Jestin of Bank of Nova Scotia, Avery Shenfeld of Canadian Imperial Bank of Commerce, Stefane Marion of National Bank Financial Group in Montreal and Craig Alexander of Toronto- Dominion Bank.

Rewarding Governments

The economists said Quebec and Canada are exposed to the risks of slow growth in the U.S. and Europe, particularly through the exports that make up about a third of the country’s output. So far, investors are rewarding governments for keeping their debts relatively low, economists said.

The yield on Quebec’s 5 percent coupon bond due December 2041 declined to 3.77 percent yesterday from 4.41 percent a year earlier according to Bloomberg data.

“The issue is direction” on fiscal policy, Jestin said. Governments that set sound fiscal policies “will be paid for that,” he said.

Shenfeld of CIBC said that while yields for Canadian provincial debt are currently “extremely low,” that could change in the next several years, a sentiment echoed by Alexander at Toronto-Dominion.

“Markets are willing to give Canada the benefit of the doubt,” Alexander said. “But at some point you have to execute.”

Quebec’s economy should grow at a pace close to 2 percent next year even with fiscal restraint, Alexander said. Action to curb the deficit “is a headwind, but not something that threatens to undermine the economy in a serious way” he said.

--Editors: Paul Badertscher, John Simpson

To contact the reporter on this story: Greg Quinn in Montreal at gquinn1@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net


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