When Moody's Investors Service announced last December that it was downgrading Ontario's credit outlook to negative from stable, it was obvious that Dwight Duncan considered it a blessing in disguise.
At the time, the provincial Finance Minister was trying to convince his Liberal cabinet and caucus colleagues of the need for austerity measures to tackle a $16-billion deficit. He was also eager to brace the general public for a budget that would deliver those measures. So, rather than trying to gloss over the threat of a downgrade, he went out of his way to highlight it as a consequence if the government didn't get its act together.
As a short-term strategy, it was at least moderately effective. But as bond raters review the budget he delivered last month, there's reason to believe that – when it comes to the Liberals' interests, if not the province's – Mr. Duncan may have overplayed his hand.
Until their analysis is completed, likely next month, the big three credit-rating agencies won't comment publicly on where they're headed. But in government circles, there's plenty of chatter about them. And the general sense is that, while Standard & Poor's and DBRS are likely to maintain Ontario's existing ratings, there's still a very good chance of a downgrade by Moody's.
From a purely fiscal perspective, it's debatable how big a deal that would be. At "Aa1," Moody's currently has Ontario rated slightly higher than the other two agencies. So, in a sense, its downgrade would just be a correction. While it could have some marginal impact on the interest rates paid by the province, the one downgrade alone would hardly precipitate a debt crisis.
But politically, Mr. Duncan's messaging raised the stakes. By seizing on the Moody's warning, he established that agency's approval as a key test for his deficit-reduction plan. So if he doesn't get it, the perception will be that the budget was a failure – bolstering criticisms by the opposition Progressive Conservatives and others that the Liberals lacked the stomach to do what was needed –undermining the firm-hand-on-the-tiller image that Mr. Duncan and Premier Dalton McGuinty have recently tried to cultivate.
Of late, some Liberals have made some half-hearted efforts to play down the threat. In conversations, they argue that trying to predict credit ratings – which often appear to be more art than science – can be a fool's game. They hold up the relatively minimal impact of last year's downgrade of the United States, which caused considerable angst at the time, as evidence that these things can be overhyped. And they note, correctly, that Ontario's ratings are – and will remain for the foreseeable future – quite high by international standards.
Mr. Duncan, on the other hand, is almost doubling down. He continues to cite publicly the province's credit score as a key reason to press forward with implementing the budget's cost-saving measures. And he's warning about how the agencies would respond to the "instability" caused by the opposition parties bringing down his minority government in next week's budget vote.
From an outside perspective, his fixation has considerable merit. While other cabinet members push for new spending or resist cutbacks, it's the job of a finance minister during lean times to be a hawk – and to use whatever tools are at his disposal to win the necessary arguments. And his continuing efforts to win the faith of the analysts still poring over the books, such as this week's highlighting of a new internal audit system, could help avoid a post-budget lull.
His fellow Liberals, though, might understandably be less enthused. They've gone along with much of what he demanded, but they may still wind up taking heat for failing to meet a standard that he himself helped set.