12/15/2011 06:28 EST | Updated 02/14/2012 05:12 EST

Ontario Credit Downgrade: Moody's Changes Outlook To Negative


TORONTO - Moody's Investors Services dealt the deficit-plagued Ontario government a blow Thursday, putting the province on a so-called credit watch though it did not downgrade the provincial credit rating.

The New York-based bond rater said it had revised its outlook on about $190 billion of provincial debt to negative from stable .

The change is due to concerns about the province's ability to meet its medium-term fiscal targets given the recent economic slowdown and the resulting risks to its ability to stop accumulating debt, Moody's said in a release.

"The negative outlook on the province reflects the softening economic outlook, Ontario's growing debt burden, and the extended time frame to achieving a balanced budget," said Moody's assistant vice-president Jennifer Wong.

"If a credible plan to address the fiscal imbalance and stabilize the debt burden is not implemented in the next provincial budget, downward pressure on the province's Aa1 rating would emerge."

Finance Minister Dwight Duncan said the agency had put the province on a credit watch, but did not lower its credit rating, so it will not cost the government more to borrow money or service its debt because of the change.

"That is not a downgrade," Duncan told reporters.

"This does signal that they will continue to watch us carefully."

The minority government has difficult choices ahead, but has so far been able to meet its targets for reducing the $16-billion deficit by 2017, and will continue to hit short and medium-term targets, insisted Duncan. The province got the message from Moody's, he added.

"They’re very clear that in the budget we have to show we’re on target. We can’t miss targets on deficit," said Duncan.

"It challenges us to continue to meet the targets that we have so far met."

With the Canadian economy projected to grow by less than two per cent next year, Ottawa and the provinces are facing spending restraint to get their deficits under control.

Spending cuts are expected to reduce the number of jobs in the public service in Ottawa and in many provinces, while any moves to raise personal or corporate taxes could dampen consumer and business spending.

Ontario is particularly vulnerable to economic headwinds south of the border because ifs manufacturing sector — mainly the auto and related industries — is so dependent on the slowing American economy.

The Progressive Conservatives said the Moody's announcement was proof the Liberals have mismanaged Ontario's economy.

"Tonight's news is just the latest example of Dalton McGuinty and his Liberal government's incompetence," said Opposition critic Monte McNaughton.

"This is a government that has a record deficit, he's doubled the debt and Ontario now has a larger deficit than all the other provinces combined."

The New Democrats said Ontario's fiscal situation isn't surprising to people losing their jobs or seeing paycheques that don't keep up with the cost of living, and again called on the Liberals to cancel planned corporate tax cuts.

"If the finance minister is serious about tackling these fiscal challenges, he'll reconsider his plans for another round of no-strings-attached handouts to corporations that don't need our help," said NDP Finance critic Michael Prue.

Moody's said Ontario's economy is particularly affected by the moderation in U.S. growth because roughly 80 per cent of its international exports go to the United States.