A Vote for Sovereignty in Quebec Means A Federal Election and New Government to Negotiate Terms of Separation, According to Fund Managers
Contact:
Jason Clemens, Policy Analyst
The Fraser Institute, (604) 714-4544 Email: jasonc@fraserinstitute.caRelease Date: 25 November 1998
VANCOUVER, BC>>> Canadian money managers, collectively responsible for over $175 billion in assets under management, hold the view that only a newly elected federal government that excludes representatives from Quebec would have the legitimacy to negotiate the terms on behalf of the rest of Canada, according to the Fraser Institute’s Winter 1998-99 Survey of Senior Investment Managers.
In fact, two-thirds of the senior investment managers surveyed stated that of the options available, including the present federal government, a newly elected federal government that excluded representatives from Quebec would have the greatest legitimacy to negotiate the terms of separation. "This finding has dramatic political implications in that a host of senior ministers, including the Prime Minister and the Minister of Finance are from Quebec," noted Fazil Mihlar, Director of Regulatory Studies at the Fraser Institute.
The referendum in Quebec: A likely prospect
Sixty-three percent of respondents stated that the Parti Québécois (PQ), if elected, were very likely, likely or somewhat likely to hold another referendum on sovereignty. Only 29 percent of respondents felt that it was unlikely that another referendum would be held assuming a PQ re-election.
Interestingly, there was a substantial increase in the number of respondents who felt separation was plausible in the next five years. Thirty-five percent of respondents, up from just 3 percent in the Fall 1998 Survey indicated that Quebec separation was very likely, likely or somewhat likely in the next five years. The euphoria associated with Mr. Charest’s announcement to lead the Quebec Liberal Party has clearly dissipated. Similarly, the number of respondents who felt Quebec separation was somewhat unlikely, unlikely or very unlikely fell from 97 percent in the Fall 1998 Survey to 65 percent.
Supreme Court’s ruling on unilateral independence has not reduced uncertainty
Sixty-eight percent of the senior investment managers surveyed stated that the recent Supreme Court decision regarding the ability of Quebec to declare unilateral independence has not reduced the level of uncertainty regarding any future referendum. Twenty-one percent disagreed with the effect of the decision, while 11 percent indicated that they did not know the ultimate effect of the high court’s decision.
Terms of separation: Difficult path ahead
The managers also indicated that negotiations would be difficult and arduous. There was no general agreement among the respondents regarding the appropriate method to allocate the national debt. Forty-six percent indicated the use of population share while 33 percent indicated the validity of using the historical share of federal spending. The share of federal taxes was also noted as a possibility, receiving 15 percent support by respondents.
A further issue of contention, according to the managers surveyed, is the use of the Canadian dollar by an independent Quebec. Sixty-one percent of respondents stated that Quebec should be precluded from using the Canadian dollar while only 22 percent stated that an independent Quebec should be permitted to use the Canadian dollar.
Increased financial market volatility
Ninety-one percent of respondents indicated that volatility would increase sharply, increase or increase moderately following a vote in favour of sovereignty. Thirty-six percent of respondents characterised the increase in volatility as "sharp." Four percent of respondents indicated no change in volatility and none of the respondents expected a decrease in the level of volatility.
Interest rates
The respondents overwhelmingly indicated that both Canada and an independent Quebec would face higher interest costs following separation. Ninety-seven percent of respondents stated that interest rates in Quebec would increase significantly, increase or moderately increase following separation. In fact, 70 percent of respondents stated that the increase in interest rates would be "significant." None of the respondents expected interest rates to remain the same or decrease.
Similarly, 89 percent of the senior investment managers surveyed stated that interest rates in the rest of Canada would increase significantly, increase or increase moderately. However, the magnitude of the increase seemed to be less than for Quebec. Only 2 percent of respondents stated that rates would increase "significantly," while 57 percent of respondents stated that the increase would be "moderate." Clearly, both Quebec and the rest of Canada would incur higher, permanent borrowing costs. Quebec’s cost of borrowing, however would increase to a much larger extent than it would for the rest of Canada, according to the investment managers surveyed.
Bond grades
Part of the explanation for the increase in interest rates can be explained by the downgrading of bonds. Eighty-one percent of the respondents stated that it was very likely or likely that Quebec bonds would be downgraded following separation. Only 2 percent of respondents stated that a downgrade was unlikely or very unlikely.
The results for the rest of Canada and the three "have" provinces were much less dramatic. Forty-seven percent of the investment managers surveyed stated that it wasvery likely or likely that bonds would be downgraded following Quebec separation. An almost equal amount, 46 percent though, felt it was very unlikely or unlikely that Canadian bonds would be downgraded.
The results for the three "have" provinces were even more startling relative to Quebec. Alberta was the most sheltered from a bond downgrade following Quebec independence with only 17 percent of respondents stating it was very likely or likely that Alberta bonds would be downgraded. Twenty-eight percent of respondents stated that British Columbia’s bonds would be downgraded.
Ontario was the least sheltered from the negative consequences of Quebec separation with 32 percent of respondents stating it was very likely or likely that Ontario would receive a downgrade.
Lower levels of economic growth in Quebec
Eighty-four percent of the senior investment managers surveyed stated that an independent Quebec would have moderately lower or significantly lower rates of economic growth given their current economic environment. In fact, 54 percent of respondents characterised the level of growth post-separation as "significantly lower" than in the rest of Canada. Only 2 percent of respondents stated that growth rates would increase moderately in Quebec after separation. Nine percent of respondents felt that growth rates would remain the same.
Minister of Finance’s performance evaluation continues to decline
Sixty-three percent of the senior investment managers surveyed rated Mr. Martin’s performance as the Minister of Finance as excellent, very good or good. This is a decline of 18 percent from the Fall 1998 Survey in which the Minister of Finance received 81 percent approval. More striking is the fact that investment managers rated Mr. Martin’s performance unanimously positive in the Winter 1997 Survey; 100 percent of respondents stated the performance was excellent, very good or good. Similarly, the number of respondents disapproving of the Minster’s performance increased from 14 percent in the Fall 1998 Survey to 37 percent in this survey.
The survey respondents have identified taxation (70 percent), specifically the high level of taxes in Canada as the most important issue facing the federal government, up from 37 percent in the Spring 1997 Survey.
"Given the importance attached to taxes by the investment managers, the downgrade in job performance could be attributed to Mr. Martin’s reluctance to embark on broad-based personal income tax reductions," said Mr. Mihlar.
About the survey
Surveys were mailed to senior investment officers at 129 investment management firms across Canada. Forty-seven responses were received between October 1, 1998 and November 3, 1998. These respondents manage over $175 billion worth of pension assets. Numbers may not add up to 100 percent due to rounding. Statistical confidence levels were not assigned to the results.
Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver.
For further information:
Suzanne Walters, Director of Communications,
The Fraser Institute, (604) 714-4582,
Email suzannew@fraserinstitute.ca
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