Canada Kicked Out of the AAA Club

—The Mortgage Report: June 24—

  • We Just Got Downgraded: The government is spending too much and it’s caught up with them. Our record quarter-trillion deficit worried Fitch, a ratings firm, enough to cut Canada’s credit rating today. “Pandemic lockdown measures and depressed global oil demand will cause a severe recession of the Canadian economy,” it says. Fitch projects Canada’s consolidated gross general government debt will soar to 115.1% of GDP in 2020, from 88.3% of GDP in 2019. Loss of our AAA rating implies incrementally higher risk of default, so investors could demand higher interest rates on Canadian debt. That would theoretically boost borrowing costs over time. As we speak, however, the 5-year bond yield is down since the news broke. It’s hard to say how much of that is thanks to the Bank of Canada, which has been buying billions of dollars of bonds for weeks. (Bond buying raises bond prices, other things equal. That lowers interest rates, since prices and yields move inversely.) At the end of the day, this news doesn’t change Canada’s outlook significantly. The U.S. is a case study. It lost its perfect AAA bond rating in 2011 and never got it back. Since then, U.S. 5-year rates have dropped 76 bps. There are clearly greater forces are at play than credit ratings. Thankfully for now, there’s no adverse impact on Canadian yields, and hence no current effect on mortgage rates.



8 Comments

  • Mad in the Maritimes says:

    Are politicians going to give hundreds of billions of dollars away every time there is a recession now? How can anyone with fiscal sense think this is a good idea? The taxes are already outrageous in this country. Citizens who work till July to pay their tax bill cannot bear any more. These spend-happy Liberals must go before Canada is downgraded to single-A. At this pace we’ll soon be paying a 60% marginal tax rate like Sweden.

  • Vince says:

    Has Canada ever lost is AAA rating before?

  • Beginner says:

    Seems like a sign of the times with governments and populations alike up to their eyeballs in debt. AA+ is the new AAA, and I’m sure there will be many more joining that club soon thanks to the havoc COVID-19 has wreaked upon countless countries’ finances.

  • Robbo says:

    During a massive recession federal deficits don’t matter. In fact they don’t matter much ever. :-O
    https://www.publicaffairsbooks.com/titles/stephanie-kelton/the-deficit-myth/9781541736184/

    • The Spy says:

      Hi Robbo, One of these days we’ll have to do a primer on Modern Monetary Theory, which is essentially what you’re espousing. It’s a topic of spirited debate in economic circles but has growing acceptance in our low rate / low inflation world.

      But, while almost everyone agrees deficits are necessary during economic crises. There’s ample disagreement on the acceptable size and persistence of deficits. Regardless of which side of the debate you’re on, we know five things:

      1) MMT works better with rates near zero (which may not last forever)
      2) MMT works better for the U.S. than Canada (since everyone wants U.S. currency, the U.S. treasury can borrow in that currency, and it can print a “more unlimited” amount of U.S. dollars)
      3) Even MMT proponents admit that deficits can grow too large
      4) If interest payments keep growing faster than GDP (which hasn’t been the case thus far) we’d eventually have big problems
      5) The supply of government debt under an MMT regime would explode (if supply trounces demand, rates go up and critics argue MMT could unravel)

      Clearly deficits aren’t a problem today, but when authorities like Fed Chair Powell call MMT “Just Wrong” (https://www.youtube.com/watch?v=EbG6rLgw7_Y) we best dig deeper into this supposed economic panacea. When politicians frivolously spend money we don’t have while citing unproven theory, it creates potential risk for all Canadians.

  • Appraiser says:

    With most of the world still not fully recovered from the GFC of 2007 / 2008, along comes a worldwide pandemic 12 years later to bash the economy again.

    As stated, MMT works for long periods of low inflation and stunted interest rates. Which is exactly where we’ve been for almost the last decade and a half and is most likely where we are headed for the next 15 years.

    That’s about as modern as any theory gets.

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