A question that has been bothering me for a while: what are financial rating firms like the American Moody’s and S
To answer these questions, La Presse called on Louis Lévesque, a career financial economist and former senior executive at the finance ministries in Quebec and Ottawa. Mr. Lévesque is Chair of the Public Policy Committee at the Association des Économies Québécois (ASDEQ).
“What credit rating firms do, essentially, is an assessment of the credit quality of large borrowers and issuers of debt securities like bonds. It is also an assessment of the risk of default for financial lenders and debt investors in the financial markets,” explains Louis Lévesque.
This function of financial rating firms concerns both large companies in the private sector and governments and their main state corporations that issue debt securities to finance themselves.
Based on detailed analyzes of the financial statements and budget plans of these heavy borrowers, financial rating firms assign them a credit rating on a scale that ranges from the best AAA rating, given to borrowers of the highest financial quality, to the worst D rating, which is given to borrowers who are insolvent and default on their loans or debt securities.
These financing costs include the interest rate and the borrowing conditions (collateral assets, payment period, maturity, etc.) requested from a borrower.
Moreover, changes in the credit ratings granted to a major borrower can affect the market value of its debt securities (bonds) issued on the financial markets.
For example, a deterioration in the credit rating of a company or, more rarely, a government usually causes a loss in the value of its debt securities already on the market.
If it persists, this loss in market value may then have repercussions through an increase in the interest rate yield demanded by buyers of their next issues of debt securities.
“For governments that borrow and issue bonds, the level of their credit rating is decisive for their financing costs to be included in their current budget, and in their future budgets according to the evolution of their financial capacity and their level of indebtedness”, indicates Louis Lévesque.
In Canada, the federal government has the highest credit rating, AAA, of all major Canadian borrowers and debt issuers.
This is followed by the governments of the main provinces, i.e. Ontario, Quebec, Alberta and British Columbia, which obtain credit ratings of level AA or A.
How do these federal-provincial credit rating gaps materialize?
“Secondly, it is in the interest yield of the debt securities issued by these governments that the gap in their credit rating manifests itself. These days, for example, the federal government issues 10-year bonds with an interest rate of around 3.55%. This rate is slightly increased to around 3.75% for 10-year bonds issued by the Quebec government, and around 3.8% for bonds issued by Ontario. »
Quebec finances itself at a lower cost than Ontario?
” In effect. For the past few years, the Government of Quebec has enjoyed a slightly better credit rating than that of Ontario, and can therefore finance itself at an advantageous cost despite the sharp rise in interest rates,” points out Louis Lévesque.
“This favorable [credit rating] spread in Quebec is essentially the result of budgetary management and debt reduction measures taken by governments in Quebec during the 2000s and 2010s.”
