Canada's Credit Rating: Rating Agencies, Markets and Reality

May 8, 2025

All but the most self-deceptive progressives realize Canada is on a downward trajectory and has been so for years, if not decades. Real G.D.P. per capita has not grown for years and has likely declined. Personal income after taxes, shelter costs, and food has plummeted in real terms. Over 20% of Canadians experience food insecurity; about half the rate that Americans do, despite the Canadian conceit that “we take care of our poor”.

Canada’s government debt situation has also steadily deteriorated. Apparently, debt growth has not stimulated economic growth the way governments had hoped. Canada is not alone here. At the end of 2024, Canada’s gross total government debt to G.D.P. ratio stood at 111% of G.D.P. The ratio was 92% when the Liberals took office in 2015, and is far above the 2007 pre-financial crisis level of 67%. The current figure is now above the 100% level in 1995 when Canada was in a sovereign debt crisis.

Rating agencies had cut Canada’s AAA rating during that crisis and were warning of further cuts. This was before the Great Financial Crisis when rating agencies lost much of their credibility after completely failing to appropriately evaluate the structured note market. Even people at the IMF and World Bank were raising concerns about Canada’s economic future. Foreign investors were dumping Canadian bonds. During that crisis, the Canadian dollar went from 91 cents to 63 cents U.S., a drop of over 30%.

I remember getting phone calls from foreign based fund managers asking me if they thought Canada would default. I explained to them that my best guess was that Canada would make good on its obligation but the Loonie would fall, and Canadians would get poorer as the government raised taxes and cut services. I turned out to be right, not because of any brilliance on my part but because international bond markets were simply going to force the Canadian government to capitulate to financial responsibility.

This begs the question: why are we not hearing anything from the rating agencies on Canadian debt. Government of Canada bonds continue to be overwhelmingly rated AAA despite a deteriorating situation that everyone from a bank C.E.O. to a reasonably aware middle-school student understands. The Loonie has dropped from 83 cents four years ago to 72 cents. The Loonie went below 69 cents at one point but then President Trump thought it would be a marvelous idea to torpedo the U.S. dollar.

The ratings agencies have simply lost their relevance for true professional market players. They are basically a regulatory nuisance with respect to the sovereign credit of industrialized nations. Fund managers have guard rails on most funds. They can only buy credits with that meet a certain rating minimum. In turn, agencies get paid enormous subscription fees relative to the work they actually do from institutional investors so those investors can keep up the appearance of serious due diligence.

It is unfathomable that nations like Canada and others can deteriorate economically and fiscally to the extent they have without having their credit ratings cut. To make matters worse Alberta and Saskatchewan have experienced an explosion in separatist sentiment. Without Alberta and Saskatchewan providing financial aid to Quebec, the Belle Province may feel their time to leave has come. The Carney government seems more pre-occupied with its radical climate agenda than addressing the grievances of Canadians outside the Windsor-Quebec City corridor or fixing Canada’s financial situation.

Certainly, Canada is far above basket cases like Turkey with its BB rating but it no longer deserves a AAA rating. A rating of AA with a negative outlook would be more appropriate for Canada. I suspect the agencies don’t want to rock the boat, endure political pressures and have subscriptions cancelled.

What isn’t being reflected in the markets, is that Canada’s fiscal situation could get a lot worse and a lot more quickly than most would admit. We may be sleepwalking into a crisis and investors need to wake up. Given the underlying economic conditions today and the impending Trump tariffs, Canada will almost certainly enter a consequential economic downturn. Unemployment rates tend to increase by at least 50% from cyclical lows during downturns. The only exception to this was the 2000 downturn which was barely noticeable. A 50% rise from cyclical lows of 5% would put peak unemployment at 7.5%. Given, the layoffs expected in Canadian industries that are integrated with the U.S., we would be fortunate if unemployment peaked with a 7 handle. Total gross government debt could easily swell to over 130% of G.D.P. The Federal government tends to use “net” debt, which is gross debt minus assets which show a more sustainable number but it is doubtful if the government would or even could sell those assets in a crisis. They may temporarily raid the Canada Pension Plan portfolio. The Feds also conveniently exclude provincial debt. This is absurd and deceptive. Other nations do not have provinces or states that come anywhere near to the debt levels of the Canadian provinces. Ontario is the world’s most indebted sub-sovereign borrower.

The Canadian debt situation is not dire…yet. If the economy can begin growing again with tax cuts and deficits are reduced with spending cuts, Canada would be in a much better situation by 2035. However, the Carney government has shown no appetite for this. If they implement their present strategy, things will get worse even without a recession. A major downturn would be disasterous. Also, during the last crisis in the early to mid 1990’s, Canada bond yields were much higher relative to current inflation than now. Canada has less of a real yield cushion to protect itself. The risks to Canadian bonds are not being priced into the market. Stay short in average term and look to investment grade offshore bonds markets.