Separatist Revival Raising Quebec Borrowing Costs: Canada Credit

Quebec’s borrowing costs are rising as independence once again becomes an election issue in Canada’s second largest and most indebted province.

Quebec Premier Pauline Marois called this week for an election on April 7 in a bid to turn her minority government into a majority, renewing speculation she will press for a referendum on splitting from Canada. The spread, or extra yield demanded by investors, on Quebec’s 10-year bond over debt from neighboring Ontario has widened 7 basis points to 17 basis points since the Quebec bond was issued in December, data compiled by Bloomberg shows. The spread has widened three basis points since the start of last week.

Investors aren’t “necessarily comfortable with the added political risks on top of the risks that have been associated on an ongoing basis,” David Watt, chief economist at the Canadian unit of HSBC Holdings Plc., said by telephone yesterday from Toronto. “So they lighten up on Quebec a bit, and move into Ontario.”

It would be the third plebiscite on independence in the predominantly French-speaking province since 1980. Quebec came within 54,000 votes of a majority in favor of independence in a 1995 referendum. Separatist sentiment has since cooled and has been stalled in the 30 percent range in recent years.

Debt Burden

Quebec has about C$210 billion ($190 billion) of debt, including C$24 billion that matures this year and next, second only to Ontario’s C$284 billion, data compiled by Bloomberg shows. As a percentage of gross domestic product, Quebec led all 10 provinces at 60.9 percent, according to Travis Shaw, an analyst at DBRS Ltd. in Toronto. Prince Edward Island is second at 42.6 percent and Ontario, third, with 41.6 percent.

DBRS rates Quebec A-high with a stable trend, below Ontario’s AA rating and Alberta’s AAA rating. While the Quebec budget proposed by Marois’s minority government is not expected to pass in Quebec’s National Assembly, “right now we have no reason to change the trend” outlook, Shaw said. DBRS will review its evaluation of the province after the election when the fiscal plan that emerges is clearer, he said.

Broader measures in Canadian financial markets show less concern that Marois’s separatist Parti Quebecois may have enough support to form its first majority government in more than a decade.

The Standard & Poor’s/TSX Composite Index reached a five-year high this week, while the Canadian dollar strengthened for two consecutive days versus its U.S. counterpart.

Ratings Outlook

The loonie, as Canada’s currency is known for the image of the aquatic bird on the C$1 coin, gained 0.4 percent to C$1.0985 per U.S. dollar yesterday in Toronto and touched C$1.0956, the strongest since Feb. 19. One loonie buys 91.03 U.S. cents.

“I wouldn’t pay too much attention for now,” Barbara Lambert, who helps manage C$24 billion as a senior portfolio manager at Addenda Capital Inc., said yesterday by telephone from Montreal. “It’s more the finances and what the rating agencies think, and whether they are going to meet their target, that’s going to drive that spread.”

The election and prospect of a referendum is the latest event in Quebec to unsettle investors. Quebec Finance Minister Nicolas Marceau last month proposed changes to the province’s Business Corporations Act to protect Quebec-based companies against hostile takeover bids.

Montreal, home to Air Canada (AC/B) and Canadian National Railway (CNR) Co., has seen the number of top 500 Canadian companies based in Quebec’s largest city decline to 75 in 2011 from 96 in 1990, according to the Fraser Institute, a Canadian research organization.

‘Typical Phenomenon’

Thirty-seven percent of respondents in a March 5 poll by Léger Marketing said they would back Parti Quebecois if an election were held now, compared with 35 percent for the Liberal Party. That result may be enough for the separatists to form a majority government, TVA reported.

“People are looking at a majority as a likely outcome,” said Andrew Kelvin, a senior fixed-income strategist with TD Securities Inc. in Toronto. “It’s a typical phenomenon you will see around political events in Quebec.”

Achieving the goal of independence will be tougher. Support for sovereignty in the same Leger poll was 34 percent, with 49 percent opposed, 15 percent undecided.

Open Agenda

“We want to keep the agenda open,” Marois said yesterday in Drummondville, Quebec, the Globe and Mail reported. “If a referendum is needed we will take the time to stop and listen to people’s opinions.”

If Marois wins a majority, investors’ reaction will hinge on how she interprets the victory, said Jonathan Lemco, a senior analyst with Valley Forge, Pennsylvania-based Vanguard Group Inc. and author of a book on the sovereignty movement “Turmoil in the Peaceable Kingdom.”

“If she says this is a mandate for sovereignty, then there will be mild concern in our market and there will be a little bit of bond spread widening,” Lemco said. Vanguard manages about $750 billion in fixed-income securities, including U.S.- dollar denominated Quebec debt.

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net; Sarah Rabil at srabil@bloomberg.net

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