Marois, Bloomberg and Quebec Bonds

Quebec’s bonds have been rallying since Quebec Premier Pauline Marois is downplaying the idea of a potential referendum. Bloomberg has a good article covering the topic: Pimco Says Marois ‘Mess’ Gives Quebec Opportunity.

This is good news because at the beginning of the election the combination of a Parti Quebecois majority with an open door on another referendum on Quebec’s future has increased the cost of borrowing in the province. Now, with the backtracking on a potential referendum and a change in the poll has cool down the yield on the bonds.

At the moment Quebec has a lower credit rating than Ontario and Alberta (obviously). DBRS rates Quebec A-high with a stable trend. According to data compiled by Bloomberg, Quebec has C$24 billion in debt that matures this year and carries approximately C$210 billion in debt. Already a creditor province, you certainly don’t want a spike in the borrowing cost.

Reported in the paper Le Soleil, PM Marois brushed off the potential higher borrowing cost as a joke. She referred it as an “old trick” to scare people. This attitude is the one that making her sink in the polls. The attitude of not tackling the real problems to deviate toward other topics. Not addressing the loss of jobs, the higher debt, and a deterioration of the public finance is catching up to her. It’s these hard issues that needs to be focus on to make the province stronger. Dancing around the identity card with La Charte des Valeurs and a referendum is a way to mask the real problems. If you just loss your job, like many Quebecois did, you don’t want your leader talking about the way people should dress and their religious beliefs. That’s not going to fix your problem and it’s not providing a solution to your next mortgage payment.

Why it’s important: Quebec needs to borrow on the open market to finance its deficit. It raise money by issuing bonds. The cost of borrowing is associated to its credit risk and your credit rating provides is an indicator. The lower your credit rating, the higher the cost of borrowing, and the higher the interest debt service. The higher the service on the debt as part of the budget is less money for important things like health care, education, infrastructure, and social programs. This game can work as long as the capital market likes you. Down the road, the creditor might become anxious on the direction of the province and the state of its public finance. What you don’t want is creditors forcing the government to make really bold action such as cutting funding to certain programs and raising taxes. Instead of being in control, the creditors are. And the creditors will do what’s best in their interest to make sure they get paid back, because remember you took money from them. An example of situation is Greece, where foreign creditors (e.g. IMF, Germany) are dictating the public finance. Quebec is not Greece and we are miles away from such a scenario. However, you need to address the problem now and not wait for the problem to address you.

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