The growing debt burdens of Ontario and Quebec look alarmingly large compared to most other regional and local governments around the world.
But a report to be released Monday by Moody's Investors Service argues that the two provinces' unique fiscal and economic characteristics mean they can carry heavy debt loads while still enjoying relatively high credit ratings.
Among other things, Ontario and Quebec boast "exceptional fiscal flexibility," diverse economies and sophisticated debt-management practices, Moody's says.
"The main factor that underpins the high ratings across the provinces is this unfettered access to revenue and expenditure levels," Moody's lead Ontario analyst Jennifer Wong said in an interview. "So they really can adjust their revenue and their spending."
The credit-rating agency is releasing the report Monday to "dispel the myth" that its Aa2 ratings for Ontario and Quebec are based solely on debt levels, added Michael Yake, Moody's lead Quebec analyst.
Moody's, which downgraded Ontario last April, acknowledged that the two provinces' debts are large "both in absolute terms and relative to revenues."
Foreign investors are increasingly interested in Canadian provincial bonds – in part because Canada is one of a dwindling number of triple-A rated countries, Mr. Yake said. Yet there is a lot more scrutiny of debt levels in general because of the European debt crisis.
"We were getting some questions after we downgraded Ontario," Mr. Yake acknowledged. "[Investors] saw other countries experiencing difficulty and they saw the impact of that. It raised not concern but attention on the debt level, particularly for Ontario."
Last April, Moody's downgraded Ontario to Aa2 from Aa1, a rating it had held since 2007. At the time, Moody's cited Ontario's "growing debt burden and the risks surrounding the province achieving its medium-term fiscal plan."
Moody's acknowledges that Ontario and Quebec have debt ratios that are typically associated with much lower credit ratings.
The ratio of total debt, both direct and indirect, to revenue in Ontario, for example, is more than 212 per cent. In Quebec, it's nearly 205 per cent, according to the report.
Those ratios have worsened substantially since 2007, when Ontario's debt-to-revenue ratio was 145 per cent and Quebec's was 186 per cent.
Moody's says only a handful of other regional and local governments that it rates have ratios of more than 150 per cent, "and those that do typically have ratings several notches below that of their respective sovereign." The report cites the examples of subnational governments in Austria, Italy and Spain, which have credits rating four or five notches below their national governments.
Both Ontario and Quebec are rated Aa2, just two levels below Canada's top Aaa rating. Alberta and British Columbia are the only Canadian provinces with top Aaa scores.
"Ontario and Quebec are relatively unique in the subsovereign landscape," Mr. Yake said. "It's harder to find peers. They are so different from the other subsovereigns we rate."
Unlike most regional governments, Canadian provinces have complete control over a wide range of revenue sources, including sales taxes and personal and corporate income taxes. "Direct access to these important revenue sources allows Ontario and Quebec to generate large levels of revenue, clearly a credit positive," Moody's said.
The provinces also enjoy complete control over expenditures. "The ability to react to pressures from either side of the ledger allow Ontario and Quebec to better manage their financial outcomes," according to Moody's.