64-Cent Dollar Predicted in Quebec Votes "Yes" to Sovereignty
Canada's top money mangers say sovereignty agenda affecting investment decisions
Contact:
Michael Walker, Executive Director
The Fraser Institute, (604) 714-4545 Email: michaelw@fraserinstitute.caRelease Date: 14 January 1997
VANCOUVER, BC>>> Canadian money managers responsible for over $150 billion in total assets under management expect the Canadian dollar to drop to a low of 64 cents against the U.S. dollar after a "yes" vote on sovereignty for Quebec and prior to the conclusion of a separation agreement with the Rest of Canada (ROC), a Fraser Institute survey has found. "The uncertainty fuelled by a volatile currency could have an adverse impact on a separate Quebec's and ROC's trade flows and economic activity," explained Mr. Fazil Mihlar, policy analyst at the Fraser Institute.
Downgrade of Quebec bonds: borrowing costs to escalate
Fund managers surveyed almost unanimously agree that a downgrade of Government of Quebec bonds is bound to happen in the event of a "yes" vote. In fact, 98 percent of the respondents stated that Quebec bonds are very likely or likely to be downgraded if Quebecers vote in favour of sovereignty. Ninety-three percent of those surveyed expect that Quebec Government-Government of Canada long-bond yield spreads would widen by an average value of 120 basis points. Ninety-one percent of the respondents also expect Government of Canada-U.S. long-bond treasury spreads to widen. The average expected increase in borrowing costs is 82 basis points. Indeed, some money managers also expect Quebec Government-Government of Canada and Government of Canada-U.S. long-bond yield spreads to widen by as much as 300 basis points each.
The province of Quebec has one of the highest budget deficit-to-GDP ratios among the provinces. Quebec also has a debt-to-GDP ratio of 30 percent. Moreover, Quebec received a failing grade in the latest Fraser Institute Fiscal Performance Index. "The widening of the benchmark bond spreads, along with the high budget deficit/debt would increase the cost of borrowing for a separate Quebec, and further exacerbate its fiscal problems," said Mr. Mihlar.
Money managers surveyed remain underweight in Quebec fixed-income securities
The survey asked respondents which statement best reflects their actions since the last referendum. Seventy-one percent of those surveyed stated that they have remained underweight in Quebec fixed-income securities, indicating that money managers are hesitant to hold Quebec bonds.
Sovereignty agenda and Quebec's fiscal situation affecting investment decisions
When asked what policy factors had affected their investment decisions with respect to Quebec fixed-income securities, 44 percent of those surveyed indicated that they had been influenced by the Quebec government's separation strategy. In addition, 42 percent stated that they were influenced by the Quebec government's fiscal policy.
Rest of Canada and Quebec will fail to reach a separation agreement
Sixty-four percent of Canadian fund managers surveyed believe that ROC and Quebec would fail to reach a separation agreement after a "yes" vote. "The uncertainty created by the failure to reach an agreement could damage the Canadian economy," noted Mr. Mihlar.
Rest of Canada expected to remain intact
The survey also asked respondents whether they believe the ROC will remain together after Quebec votes to separate. Eighty-five percent of those surveyed believe that the ROC is very likely or likely to remain together.
An independent Quebec responsible for 25 percent of the federal debt ($150 billion)
A study commissioned by the government of Quebec (Belanger-Campeau Commission) stated that a separate Quebec should take responsibility for only 16.6 percent of the federal debt. Sixty-three percent of the money managers surveyed, however, hold the view that Quebec's share of the federal debt should be 25 percent (allocated according to population).
Downgrade of Government of Canada bonds expected
Seventy percent of those surveyed said that Government of Canada bonds are either very likely or likely to be downgraded after a "yes" vote. This downgrade will likely increase the cost of borrowing for Ottawa and could potentially restrict its fiscal capacity.
Separation of Quebec
When asked for their views of the probability of Quebec voting "yes" to separation by the year 2002, 51 percent of the respondents gave a probability of 50 percent and over.
Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver.
For further information contact:
Suzanne Walters, Director of Communications,
The Fraser Institute, (604) 714-4582,
Email suzannew@fraserinstitute.ca
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