Analysis: Bond investors bearish on high-deficit Ontario

Tue Feb 21, 2012 4:37pm EST
 
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By Claire Sibonney

TORONTO (Reuters) - Ontario is losing the confidence of many of the investors it counts on to fund its budget deficit and could face damaging credit market downgrades unless it can convince the market that it's serious about curbing spending.

But the minority government of Canada's most populous province may find it hard to play the austerity game, as both spending cuts and tax hikes risk alienating voters.

Ontario's finances are under scrutiny after a former senior federal official - who once helped Ottawa tame its budget deficit - warned that without change, the province could eventually spin into a European-style crisis.

Former bank economist Don Drummond last week issued a series of almost 400 recommendations, urging Ontario to cap total spending growth at levels unprecedented in Canadian postwar history.

Yet market players warn the harsh medicine is necessary if the province, one of the world's biggest non-sovereign borrowers, is to regain their trust.

"It's going to take a lot of confidence building before we go back to market weight or overweight," Hosen Marjaee, senior managing director at Manulife Asset Management, said of Ontario bonds.

Marjaee, who has been underweight the province's debt for almost a year, added: "We would reduce our exposure even further if we realize that there is no light at the end of the tunnel."

The global recession left manufacturing-heavy Ontario with a debt-to-GDP ratio of almost 40 percent, which is among the highest of Canada's provinces. Its C$16 billion shortfall is Canada's biggest and the government projects it will be eliminated only by 2017-18.   Continued...