New MLI video shows that Euro-style debt crises can happen here if status quo continues
OTTAWA, May 23, 2013 – Canadian taxpayers should not get too complacent about the country's economic outlook, warns a new video by the Macdonald-Laurier Institute. Despite strong national fundamentals, many of Canada's provinces are borrowing more than they can pay back, and that profligacy could lead to serious economic turmoil down the road.
"Debtbusters: Who're broke provinces going to call?" is based on the MLI paper "Provincial Solvency and Federal Obligations" by Marc Joffre and demonstrates the increasing likelihood that at least some of Canada's provinces will default on their debts in the next thirty years.
"There is a real danger that some of Canada's biggest and most important provincial economies could default, dragging the national economy down with them" says Brian Lee Crowley, the video's presenter and Managing Director of MLI.
"For example, people would be shocked to know that if Alberta does not get a handle on its deficits it faces the highest likelihood of all provinces of default in 30 years' time" Mr. Crowley added "an 80% certainty due to high spending and reliance on volatile oil and gas revenue."
MLI research examined hundreds of thousands of scenarios to calculate these troubling numbers, and looked at factors such as resource prices, aging demographics, interest rates and more.
But even those provinces with the lowest likelihood of default are still in jeopardy; Quebec – widely believed to be Canada's chronic underperformer, actually has the lowest possibility of defaulting in the future.
As Crowley points out "remember, lowest doesn't mean low. Quebec still has a 1 in 3 chance of defaulting on its debt in the next thirty years".
Compounding the economic crisis that provincial defaults would cause are the political battles that would surely follow as Ottawa would face pressure to bail out bankrupt provinces.
Much in the same way that economic strife has gripped Europe as strong economies bail out faltering ones, demanding severe belt tightening in the process, Canada too could be racked by political convulsions fed by economic crisis.
The video makes it clear this is not just an issue for taxpayers in some provinces; provincial defaults would wound the national economy and federal bailouts would place unfair burden on all Canadians.
"Having Ottawa effectively backstop profligate provinces only encourages these risky levels of indebtedness and sets up the risk of the kind of economic and political crises seen in Europe happening here at home." says Mr. Crowley.
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