Ontario Downgraded to Aa2 on Growing Debt Burden, Moody’s Says

Ontario’s credit rating was downgraded by Moody’s Investors Service as stalling economic growth puts its debt-reduction targets out of reach.

The rating was reduced to Aa2 from Aa1 and the outlook revised to stable from negative. The downgrade brings Moody’s assessment closer to Standard & Poor’s, which previously rated Ontario two steps lower.

“There are significant risks surrounding the province’s ability to achieve their medium-term fiscal targets and stabilize and then reverse the recent accumulation in debt,” Moody’s analyst Jennifer Wong said in a report.

Canada’s most populous province is struggling to contain a C$15.3 billion ($15.5 billion) budget shortfall by freezing public-sector wages and levying a 2 percent surtax on wage- earners of C$500,000 or more. Debt of C$257.5 billion is expected to peak at a record 42 percent of gross domestic product by 2015, according to Ontario’s budget released March 27. The ratio was 27 percent of GDP in 2007-08.

“Expense targets appear particularly ambitious” in light of the “subdued growth outlook,” Moody’s said. Health-care needs may swell with demographic pressures building on the province’s biggest expense item, according to the report.

The downgrade comes after Ontario’s outlook by S&P worsened yesterday. S&P put a negative outlook on its assessment, citing “challenging cost-containment targets in the next one-to-two years.” S&P rates the province at AA-, now a level lower than Moody’s.

To contact the reporter on this story: Cecile Gutscher in London at cgutscher@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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