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BEST OF BNN: Just weeks after the Ontario's Liberal government tabled its austerity budget, Moody's Investors Service downgraded the province's credit rating one notch. The ratings agency cited the province's high debt load and risks it won't be able to hit its cost-cutting targets as the reasons behind the downgrade.
Moody’s downgrade, to Aa2 with a stable outlook from Aa1 with a negative outlook, came one day after Standard & Poor's reaffirmed Ontario’s current AA- rating, but put the province on “negative watch.”
Some investors are now left wondering whether Ontario has joined the ranks of European governments such as Greece, Spain and Italy in battling the credit rating agencies and the bond markets.
Ontario is not there yet, Craig Alexander, TD chief economist, tells BNN.
"When you compare it to the credit ratings of other provinces it has company at that level and relative to bonds issued by an awful lot of other government and sub-national groups Ontario still looks quite attractive from a debt point of view," he says.
But he says that while the market had already priced in the ratings downgrade for Ontario, investors are betting that the government is capable of hitting its fiscal targets.
"If the government falls behind its projected path in terms of how it's going to do on its deficit you do raise the possibility of the credit ratings getting downgraded further and that isn't priced into the market right now," Alexander says.
He warns that many investors and voters are underestimating the degree of fiscal austerity proposed in both the recent provincial and federal budgets.
Alex Jurshevski, founder of Recovery Partners, agrees. He tells BNN that while the fiscal cuts proposed by the government would help gets it debt levels under control, hitting those targets may be harder than many anticipate.
"In the context of history this is ambitious. This Liberal government has spent a lot of money and racked up a lot of debt in its time in office," he says. "They were growing spending even before the financial crisis at more than 5 or 6 percent a year -- this has to all change. They are saying it's going to change but the proof is in the pudding."