October 30, 2012 – In a column entitled, “Like Europe, Canada is attempting to run a monetary union without a proper fiscal union,” Andrew Coyne references MLI’s recent study on provincial solvency and federal obligations by Marc Joffe. The column was picked up across Postmedia newspapers across Canada including the National Post, Ottawa Citizen, Montreal Gazette, Regina Leader-Post, Edmonton Journal, Saskatoon’s StarPhoenix, Windsor Star, The Province and Canada.com. It was also picked up on Canada.com and the National Post’s Chris Selley wrote about the study in his Full Pundit review.
An excerpt from Coyne’s column below:
A new study for the Macdonald-Laurier Institute, Provincial Solvency and Federal Obligations, calculates most provinces face a better than 50% probability of default over the next 30 years, based on current trends; for some it’s a near certainty. Perhaps surprisingly, it predicts Alberta is the most likely to default in the long term, while Quebec, though it has the highest current debt load, is the least likely. The reason: Alberta’s population is projected to age the most, while Quebec is least exposed to a collapse in commodity prices.
Yet this variance in risk is not reflected in the interest rates charged on provincial bonds. That may, as the study allows, reflect investors’ confidence that the provinces will take action in time to avert a default: Again, these numbers are based on current trends, i.e. if nothing were done. Or, possibly, it may reflect a more disturbing conjecture: That the federal government would step in to bail out a failing province, if it came to that.
Would it? Should it? Can we afford to allow such expectations to take hold? Or, given the magnitude of the fiscal challenge facing the provinces in the longer term, should we not begin to think about laying down some ground rules for provincial borrowing — to complete the fiscal union our monetary union implies?