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Free AccessMNI EXCLUSIVE: BOC, Feds May Limit Provincial Fiscal Relief
--BOC, Federal Government Likely To Limit Covid Aid To Provinces
--Provincial Finances Unsustainable
By Greg Quinn
OTTAWA (MNI) - Canada's federal government and central bank will likely
restrict backstops for provinces to what's needed for riding out Covid-19, to
protect monetary policy independence and maintain fiscal discipline, said policy
experts, after an official watchdog told MNI regional finances are
unsustainable.
The Bank of Canada's plan to buy up to CAD50 billion of provincial bonds
will bankroll healthcare networks and relief payments, while part of a federal
deficit heading for 15% of GDP will also go to provinces, but authorities may be
wary of signaling weaker regions will be saved from chronic deficits.
"If that becomes an essential part to rolling over their debt on a regular
basis, then concerns about moral hazard could start to arise," said Kyle
Hanniman, an expert on fiscal policy at Queen's University who's writing a book
on government default risk. "The Bank of Canada might find it's difficult to
exit the provincial market -- I'm not convinced that's the case."
Provinces have wide powers to run deficits and sell bonds like the federal
government, but have less fiscal firepower, and some are also dependent on
cyclical industries, such as energy. They often sold debt at close to federal
government yields on the expectation Ottawa would prevent a default, but spreads
surged earlier this year and sales froze up, prompting BOC intervention.
--POLITICAL ENTANGLEMENT
Federal debt as a share of GDP is set to climb towards 50%, where it was in
the 1990s when Canada's credit ratings were slashed, but direct federal spending
and BOC moves to keep markets liquid will help blunt the argument that provinces
need longer-term support.
"The overall fiscal hit for the federal government is going to be a lot
larger as a share of GDP than it is for the provinces" said Michael Smart, a
University of Toronto professor who co-chairs a working group of the Canadian
Tax Foundation, which includes 12,000 lawyers and accountants.
The federal government will be aware of the political difficulty of
imposing fiscal rules on provinces, Hanniman said, adding that any of them in
real trouble would quietly get a quick fix over a precedent-setting public
bailout, he said. "I'm just not convinced that increasing transfers will
necessarily decrease deficits, just because provinces do have that capacity to
borrow, it might just be an excuse to put off their deficits."
Responding to an MNI question at a press conference Wednesday, Canadian
Finance Minister Bill Morneau said he would continue to talk to provinces about
the financial strain of Covid-19. Asked about risks to Canada's triple-A credit
rating, he said his focus is on a strong economy.
The BOC has set a one-year time limit on provincial buying, contrasting
with its pledge to buy more than CAD5 billion a week in federal bonds until
recovery is well underway.
"Although it's naive and misleading to say central banks are apolitical,
they don't feel the same pressure to bend to the will of provincial premiers and
other political actors," Hanniman said.
The BOC isn't disclosing exactly what provincial bonds it is buying or
setting a lower limit on credit ratings. On Tuesday it added more transparency,
showing how its actions will be tied to a province's GDP and share of debt
markets, rather than any fiscal crisis, a move MNI first reported on last week.
--STIGMA
"What they want to avoid is a stigma effect, where if you say that you are
purchasing debt of Government X, that it creates the impression in the market
that there is a particular problem for that jurisdiction," said Gregor Smith, a
BOC fellow from 2006-15.
Provinces may need to borrow an extra CAD50 billion this fiscal year, for a
total approaching CAD150 billion, BMO estimates. Energy rich-provinces are
suffering most, with Newfoundland's deficit estimated at 6% of GDP, and
Alberta's at 5% of GDP.
Canada's parliamentary budget officer Yves Giroux told MNI provincial
finances look unsustainable over the long term while the federal government is
on more solid ground even as its deficit surges. "There will be renewed demands
for pandemic preparation kits for increased public health care expenditures,"
Giroux said.
"Two years from now, I think that we will be past this crisis, the dust
will settle, and provincial debt to GDP ratios will be on the order of 5
percentage points higher than today. That's a major shock to the provincial
sector, but it's a shock that I believe we can tolerate," Smart said.
--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com
[TOPICS: M$C$$$,MC$$$$,MR$$$$,MT$$$$,MX$$$$,M$$CR$,M$$FI$]
To read the full story
Sign up now for free trial access to this content.
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.