The impact of higher interest rates on the cost of servicing government debt /

Another reason for the lower risk federally is the pos- sibility of the Bank of Canada purchasing federal government bonds essentially by printing more money to reduce the federal debt and deficit.9 Kneebone (1994) argues that the downgrades of the credit ratings of provincial governments dur- ing the Canadian debt crisis of the 1990s, without corresponding downgrades of the federal government’s c [...] More generally, the difference, or “spread,” between the interest rate on a bond of a provincial govern- ment, versus the rate on a bond of the federal government, is a measure of the relative risk that investors place on the probability that a provincial government will default on the repayment of its loans. [...] The second section of the table shows the impact of the Scenario 1 interest rate shock, which assumes a modest increase in the interest rate above the Ontario govern- ment’s projection in 2016–17, followed by a further unanticipated modest increase in the following years, except in 2019–20 when the rate is identical to the rate presumed to be anticipated by governments (though unannounced in the b [...] Another reason for the discrepancies between the cost of interest reported in the provincial budgets and the model-based simulations is likely due to the fact that the interest rate on direct debt may differ from the interest rate applicable to other government liabilities. [...] The lump-sum adjust- ments to the weighted-average interest rate are necessary to reconcile the level of the cost of debt service with the model’s estimates of interest payments, but the adjustments will have little bearing on the change in interest payments resulting from increases in interest rates.