Analysis: Rating threat adds to Ontario budget pressure

Fri Dec 16, 2011 3:54pm EST
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By Claire Sibonney

TORONTO (Reuters) - Moody's threat to downgrade Ontario's debt rating will likely spur the Canadian province to take bolder moves to rein in its C$16 billion ($15.4 billion) deficit.

Analysts said the credit rating agency's move, similar to the downgrade threats facing many euro zone nations, will give Ontario's minority Liberal government cover to implement unpopular moves like deeper spending cuts or tax increases.

"It's not easy for a government to take on a prolonged period of austerity and I think this will serve to awaken the public to the move on this all-difficult challenge, along with other rating agencies that have already spoken," said Derek Burleton, deputy chief economist at Toronto-Dominion Bank.

Moody's lowered its outlook on Ontario's debt rating to "negative" to reflect the province's growing debt burden as growth in the region slows down.

The move follows earlier ratings downgrades by Standard & Poor's and DBRS in the fall of 2009, after the province announced a record deficit in the wake of the global economic downturn, and a similar outlook downgrade by Fitch this past May.

The Moody's news only slightly hit Ontario government bond prices, with the 10-year bond yield 92 basis points above its Canadian government counterpart, up from 90 basis points on Thursday. The spread was just 60 basis points in February.

Burleton noted that Moody's was one of the last ratings agencies to respond to Ontario's fiscal challenges, which limited the market impact.

Unlike governments in other jurisdictions, Ontario's Liberals have said they will not introduce sweeping austerity measures. Returned to power with a minority this fall, they pledged to go ahead with increased - albeit curbed - spending in healthcare and education, as well as an ambitious green energy program and promised tax cuts.   Continued...