Who is financing Canada’s debt? At the risk of surprising you, the answer to this question is quite simple: you and me. Most of the bonds issued by the Government of Canada to fund its operations are purchased by Canadian investors, including individuals, pension funds, financial institutions and the Bank of Canada.
Three-quarters of the Government of Canada’s total debt is funded by Canadian investors, according to a recent Department of Finance report.1
It’s the same in the United States. Contrary to what one might think, it is mainly the Americans themselves who finance the American debt. Bond funds, insurers, municipalities, corporations and the US central bank hold US federal government debt securities.
These debt securities are popular because they offer an attractive yield and are safe. A sovereign government can go into enormous debt, as long as it finds buyers for the bonds it issues in the market. These are sought-after investments, because a country honors its debts and cannot go bankrupt, barring exceptions. The financial situation of the richest countries is closely scrutinized by rating agencies, which give them a rating according to their level of risk. Canada and the United States are countries that enjoy a good credit rating and have no difficulty in financing themselves on the market.
This is especially true for the United States, whose currency is considered a safe haven and is used in the bulk of international transactions. Most countries want to hold US dollars, either directly in foreign currency in their reserves or indirectly by buying debt securities.
This is why the American debt may have increased year after year and reached an all-time high, the country has no problem financing itself.
Many countries are not in such a comfortable situation. The poorest countries cannot count on a pool of local investors and do not have much attraction for foreign investors. Institutions like the International Monetary Fund and the World Bank can provide them with the financing they need to develop, under certain conditions.