MONTREAL, March 6, 2013 /CNW Telbec/ - Quebec's direct debt amounts to
47% of GDP, the highest ratio among all Canadian provinces. Unusually
low interest rates make this heavy burden sustainable, at least for the
time being. But what will happen when borrowing costs rise? Lenka
Martinek, chief strategist of Daily Insights at BCA Research, estimates that a 2% rise in interest rates would
require $1.3 billion in additional spending on debt service in 2018.
And this scenario does not take account of a potential recession.
Ms. Martinek, the author of a new study published by the Montreal
Economic Institute, notes a rather unorthodox state of affairs:
although Quebec's debt nearly doubled between 2000 and 2012, its cost
of debt service declined, falling from 14.8 % to 10.9% of government
revenues. Historically low interest rates explain this phenomenon.
"A 2% interest rate increase is a plausible scenario in the medium
term," the author states. "Considering that about one-third of Quebec
government bonds mature between now and 2018, the average borrowing
cost would go from 4.2% to 4.8%. At a time when the government is
struggling to balance its budget and having to limit spending, it would
be paying $1.3 billion more per year in interest, equivalent to the
combined budgets of the Environment, Culture and International
Relations departments. This is what makes it necessary to stay focused
on a zero deficit and to move as soon as possible toward reducing our
The Viewpoint entitled How would higher interest rates affect debt service costs? is written by Lenka Martinek, chief strategist of Daily Insights at BCA Research, and may be consulted at iedm.org.
The Montreal Economic Institute is an independent, non-partisan,
not-for-profit research and educational organization. Through its
publications, media appearances and conferences, the MEI stimulates
debate on public policies in Quebec and across Canada by proposing
wealth-creating reforms based on market mechanisms.
SOURCE: MONTREAL ECONOMIC INSTITUTE
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