March 14, 2018 / 5:49 PM / 5 months ago

UPDATE 1-Quebec govt says to cut debt by C$10 bln as election looms

(Adds quotes from economist, details of plan, reaction from party leading in polls)

MONTREAL, March 14 (Reuters) - Quebec plans to draw about C$10 billion ($7.72 billion) over the next five years from a specialized fund to tackle the Canadian province’s debt, Premier Philippe Couillard said on Wednesday.

Couillard’s Liberal government, which is lagging in polls ahead of October elections, said it would use the province’s Generations Fund, a trust fund set up to reduce public debt, to pay it down by C$2 billion a year, starting in 2018-2019.

“These payments will serve to reimburse loans that are coming to maturity and will directly reduce Quebec’s debt in financial markets,” Couillard said in Quebec City.

The plan would allow the province to reduce its debt-servicing costs from C$11 billion to C$10 billion a year.

The Liberal plan to cut debt also has support from the centre-right Coalition Avenir Quebec (CAQ), which recent polls have suggested would form the province’s next government.

“I find it’s a good idea,” CAQ leader Francois Legault told reporters in Quebec City on Wednesday afternoon.

Despite the poll weakness, investors have warmed to Couillard’s Liberal government for delivering successive balanced budgets and investing in the Generations Fund, which has grown to C$13 billion from C$10.5 billion two years ago, said Laurentian Bank Chief Economist Sebastien Lavoie.

“This proposal is definitively market-friendly for bond holders,” said Lavoie by email.

The plan, first reported by the French-language newspaper La Presse, comes as interest rates are on the rise. The Bank of Canada has hiked rates three times since July and has said it will be cautious in considering further moves.

Quebec has a debt-to-GDP ratio of about 52 percent and Couillard said that will fall to below 50 percent by next year. The province will present its next budget on March 27. ($1 = 1.2947 Canadian dollars) (Reporting by Allison Lampert in Montreal and Leah Schnurr in Ottawa Editing by James Dalgleish)

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