Article content continued

It has been suggested that although the Greek crisis could have been resolved quickly at relatively little cost, European policy-makers are more worried about setting a precedent for larger countries such as Italy and Spain. Here the Canada-eurozone comparison gets uncomfortable. What if instead of Manitoba, it was Quebec or even Ontario that ran into debt troubles?

Government debt loads are often expressed as a share of GDP because GDP is a good proxy for a government’s ability to generate tax revenues. Quebec’s net government debt is about 53 per cent of GDP; Ontario’s is 41 per cent. This doesn’t sound very alarming compared to countries in southern Europe (Greece’s was at 110 per cent of GDP in 2008), but debt-to-GDP ratios severely understate Canadian provinces’ indebtedness. Queen’s Park and Quebec City share their tax bases with Ottawa, so their ability to extract revenues is restrained. They are closer to the debt wall than what their debt-GDP ratios suggest.

To be sure, there’s no immediate risk: neither Ontario nor Quebec has any difficulty selling its bonds. But then, neither did pre-crisis Greece. We don’t really know to what extent low yields on provincial debt are influenced by the belief that the federal government and/or the Bank of Canada will intervene in a crisis — or what would happen if the bond market were suddenly disabused of that belief. Debt crises can be self-fulfilling prophesies: the fear of default could provoke a spike in interest rates, making it difficult to service what had previously been a manageable level of debt.

The eurozone has spent the past six years improvising a debt-management strategy, with little apparent success. Perhaps the main lesson that Canada should take from the Greek debt crisis is the importance of setting out in advance the ground rules if ever a provincial government did run into debt problems.

National Post