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| Canada could be facing a credit downgrade soon because of the massive federal assistance needed in the coronavirus pandemic. |
Somehow Ottawa has to shoulder a good chunk of these liabilities
There is a very good chance that the need for more massive federal assistance for the provinces, households and the business sector will trigger a downgrade in Canada’s credit at some point soon.
It may be true that the federal government went into this mess with a seemingly well contained debt-to-GDP ratio of 31 per cent, but for the entire economy, at all public and private sector levels, that ratio is an unprecedented 350 per cent. Canada in aggregate doesn’t have a AAA-rated balance sheet to begin with and now Ottawa has to somehow shoulder a good chunk of these liabilities.
In the end, it doesn’t matter what the rating agencies do, as we saw with the inconsequential U.S. debt downgrade in the summer of 2011. It has to be remembered that prior to 2002, the Canadian federal government was frequently rated as an AA- credit by at least one of the major agencies. I’m not sure anyone cared or even noticed … as much as it may be a source of national pride.
Canada may end up being lucky if all it ends up seeing is a cut to AA
Remember that in 2002, when the Canadian government was an AA- credit, the all-in debt-to-GDP ratio was more than 100 percentage points lower than it is today. And we also have to keep in mind, especially now that the government is being forced to backstop everyone, that the national balance sheet really is Ottawa’s balance sheet when crises emerge.
Ireland is a classic case in point. In several stages during the Great Financial Crisis, the federal government felt compelled to bail out the banking sector, which, when all sector liabilities were included, meant that the government debt-to-ratio ballooned to 110 per cent from 21 per cent within four years’ time (it was really north of 300 per cent when all the guarantees were factored in).
Prior to that recession, Ireland, like Canada today, possessed a AAA-rated federal government balance sheet. By 2011, all three major agencies had downgraded the sovereign credit ranking to BBB. Canada may end up being lucky if all it ends up seeing is a cut to AA.
Source: David Rosenberg | Financial Post
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