OTTAWA — The risk of a government default on its debt is lower in Canada than anywhere else in the world, a survey by TD Securities suggests.
Chief strategist Eric Lascelles examined credit default swap data for 25 countries, and found markets believe there is only the slimmest of chances that Canada would ever default on its obligations.
“Canada is now regarded as quite possibly the world's safest sovereign country in terms of the solvency of the country's government,” Mr. Lascelles said in a research note.
“Since it is the government that is generally called upon to fix major problems that crop up, this suggests that the market does not expect major problems out of the broader Canadian economy and financial sector.”
Sovereign credit default swaps are the market's way of putting a number on the chances of a government defaulting on its debt. Canada's five-year CDS levels are at 13 basis points, which is less than half the rating given to second-place Germany, at 33 points. The United States is at 38 points, while Spain is at 93 and Korea is at 561.
“On the surface, this seems surprising, given how closely Canada is linked into the U.S. economy and into commodity prices, and how both of those two erstwhile pillars have recently crumbled,” Mr. Lascelles said.
But CDS evaluates a government's capacity to handle its obligations over the long term, and not near-term economic prospects. Since Canada's banks aren't in huge trouble and don't look like they will require a massive bailout, and since Ottawa has been running fiscal surpluses for the past decade, the government's obligations aren't expected to be onerous, regardless of the recessionary conditions in the Canadian economy, Mr. Lascelles explained in an interview.
“Canada does look fairly attractive when viewed through this lens,” he said.
Still, the CDS market for Canada is hardly an everyday measure of sovereign risk. It is hard to find data, and the market is considered to be quite illiquid, Mr. Lascelles conceded.
Often, the Canadian dollar is also a manifestation of global opinion about a country's economy, he added. But nowadays, the loonie is lurching about based on factors that have nothing to do with Canada and are linked to risk aversion, U.S. strength, and other measures.