Newspaper article The Christian Science Monitor

Drop in Canadian Dollar Reflects Budget Concern A Major Portion of Canada's Debt Is Funded by Foreigners

Newspaper article The Christian Science Monitor

Drop in Canadian Dollar Reflects Budget Concern A Major Portion of Canada's Debt Is Funded by Foreigners

Article excerpt

CANADA'S federal government came under fire last week as interest rates jumped, stocks fell, and the Canadian dollar weakened, raising fears that this nation's economic recovery might be crushed.

Canada's dollar fell in value to 71.62 cents (United States) - a low not seen in seven years - before bouncing back late in the week. The Toronto Stock Exchange index fell 7.3 percent in two weeks. And short-term interest rates rose to 6.21, despite Canada's low 1.8 percent inflation rate.

Opposition politicians and financial economists quickly pointed the finger at Finance Minister Paul Martin, saying investors in Canadian bonds lacked confidence that his February budget was a real commitment to cut the federal deficit to 3 percent of gross domestic product (GDP) in two years from 6.4 percent in the most recent fiscal year.

That's hogwash, Mr. Martin said in so many words. He claimed that the budget deficit targets would be met. A day later, Gordon Thiessen, Canada's new central banker, also offered soothing words. Soon after, bond market selling in the US and Canada cooled, Canada's stock markets calmed, and its currency bounced back a little. The faces of Canadian investors became less grim. Public discussion of who or what is at fault continues, but the volume has dropped.

Yet there remains an acute awareness among Canadian economists and politicians that the blow from the bond-market turmoil has hit Canada harder than it has the US.

Higher debt costs. Debt-service costs on the $511 billion (Canadian; US$369 billion) owed by the federal government are rising. For every percentage point interest rates go up, an additional $1.7 billion is owed. Interest rate hikes since February have increased the government's debt by as much as $2 billion, raising fears this will blow the budget.

Long-term economic damage. US economists say damage to the US recovery will be small if long-term interest rates do not rise much higher. Canadian economists, by contrast, say interest rates will fall back much more slowly, if at all. That may dampen home and car sales, discourage investment, and keep the unemployment rate in double digits.

Continued weak currency. …

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