DBRS Round Table Consensus: Canada Not Immune to Sovereign Debt Fallout

Despite having its own fiscal house in order, Canada is not immune to the sovereign debt turmoil currently racking the global economy, according to a round table attended by the Right Honourable Paul Martin and hosted by DBRS in Toronto on November 30, 2011.

The unique DBRS round table on the global sovereign debt crisis was held at the Munk Centre, University of Toronto and featured a deep and broad range of participants, including policy makers, business leaders and academics, such as Professor Donald Brean.* The round table examined the political and financial risks of the global sovereign debt crisis and the implications of this “new crisis of confidence” on Canadian growth and prosperity. It also discussed potential global policy prescriptions and for Canada.

Professor Brean set the stage by asking, “Is it wise to keep the monetary euro zone?” and noted, “There is too much politics and not enough economic good sense.” While initial discussion focused on the euro zone in terms of its fiscal, political and structural issues, it was widely acknowledged that there is no such thing as a local crisis. A financial crisis affects all of us.

The Right Honourable Paul Martin, who is often credited with restoring Canada’s fiscal health in the 1990s, voiced concern about the country’s vulnerability in this global crisis: “The paralysis we see in Europe, we will see repeated in the rest of the world if we don’t create the institutions that will make globalization work.” In particular, Mr. Martin and others called for the strengthening of multilateral institutions to see the European nations through the crisis. One of the institutions cited was the Financial Stability Board, which under the new leadership of Mark Carney, Governor of the Bank of Canada, is now seeking a form of legality to give it “teeth” to assist in global financial regulation and stability. Participants also noted the need for governments to deal with long-term issues of fiscal stability before they reach crisis dimensions, at which point extremely uncomfortable austerity measures need to be implemented.

Apart from the need to address global structural change, concern was expressed about what can be done in the short term to safeguard Canada’s economy. It was felt that the business community and the private sector could help facilitate the dialogue necessary for healthy fiscal balance, to stimulate growth and to make tough choices. Participants also warned against Canadian complacency, noting that long-term demographic trends will place strains on the Canadian fiscal situation and calling on governments to deal with the challenges in a proactive and practical way, making the necessary decisions that will ensure stable and sustainable budgets over the coming years. Just as Canada is reaping dividends today for difficult decisions made 15 years ago, a number of participants stated that our country needs to be making decisions today that will help ensure our prosperity and stability 15 years from now.

Huston Loke, President of DBRS Limited, summarized the round table: “The ground is shifting so rapidly that it is just not enough for Canada to rest on its fiscal laurels. There are important steps that can and should be taken to ensure that we retain the economic advantage – especially in the financial services sector – that we, as Canadians, now enjoy globally. And, independent of government action, the sector itself – now more than ever – has to demonstrate the solid stability, reliability and integrity that have garnered it so much international acclaim over the last three years.”

DBRS has its headquarters in Toronto, with offices in Chicago, London and New York, and covers entities worldwide.

• Dr. Donald Brean is Professor of Finance and Business Economics at the Rotman School of Management and Director of International Economics at the Munk School of Global Affairs, where he is also Co-director of the G20 Research Group.