Canada’s AAA Credit Rating Under Threat from Rising Debt Levels
Canada is at a higher risk of losing its AAA credit rating than other top-rated countries if the government fails to demonstrate fiscal discipline, according to Royal Bank of Canada (RBC). This warning comes on the eve of Finance Minister Chrystia Freeland’s new budget.
The Importance of Maintaining a High Credit Rating
Canada is one of only a handful of countries that have achieved the highest credit rating from both S&P Global Ratings and Moody’s Investors Service. However, its households are highly leveraged due to high housing costs, while the government has a relatively low level of net debt.
The Risks of a Downgrade
A downgrade in Canada’s credit rating could have severe consequences for the economy. Economist Rachel Battaglia warns that even though deeper deficits and higher associated sovereign borrowing costs may seem like a distant problem for many Canadians, their impact can trickle down to most households and businesses.
The Potential Consequences of a Downgrade
- Higher borrowing costs across the economy
- Increased financial burden on households and businesses
- Potential for economic instability
Provincial Governments Already Feeling the Pinch
Some provincial governments are already experiencing the effects of rising debt levels. For example, Quebec’s bond yields widened compared to Ontario’s after it announced a large borrowing plan to plug large deficits.
The Need for Fiscal Discipline
Battaglia notes that the development in Quebec should not be lost on the federal government as it prepares its fiscal plan. Any signs of loosening control over public spending will result in similar reactions from bond markets, leading to higher borrowing costs for Canada’s sovereign debt.
Connection Between Federal Borrowing Rate and Consumer Loans
The rates that banks charge consumers for mortgages and other loans are closely correlated with the federal government’s borrowing rate. Therefore, it is essential for the government to maintain control over its spending to prevent a rise in borrowing costs for Canadians.
Conclusion
Canada’s AAA credit rating is at risk if the government fails to demonstrate fiscal discipline. The consequences of a downgrade could be severe, and it is essential for policymakers to take this warning seriously. By maintaining control over public spending, the government can ensure that Canada continues to enjoy its high credit rating.
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