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 debt level."
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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