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As the sovereign debt crisis fuels a flight to quality, Canada is increasingly looking like a favourable landing spot for foreign capital, experts say.

"We're not problem-free, but on a relative basis we look great," said Mark Chandler, fixed-income strategist at RBC Dominion Securities Inc.

Canada's financial attributes today include one of the strongest credit ratings in the world, relatively low debt as a percentage of gross domestic product, a stable currency, a resilient banking system and a flexible monetary position.

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Foreign investor interest in Canadian debt - and the currency needed to buy it - has been growing during the sovereign debt crisis, kicked off last year by Dubai. Greece's struggle to manage its debt appears to be accelerating the trend.

The Canadian dollar rose against major currencies yesterday, gaining more than a cent on the U.S. greenback. The rise followed news from a summit of European Union leaders in Brussels that they would "take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area as a whole."

The EU leadership is trying quell fears that the Greek debt crisis could spread to other countries, including Spain, Portugal and Ireland, and damage the euro. But the EU did not offer a financial bailout or a detailed rescue plan yesterday.

The Middle East is one example where the managers of massive foreign-exchange reserves are looking to diversify their holdings beyond the U.S. greenback and the euro. "Part of it is reducing their exposure slightly to the U.S., but part of it is wanting to get into these countries that they view as having promising prospects. Canada and Australia come to the fore regularly in those sorts of discussions," said Eric Lascelles, chief economics and rates strategist at TD Securities.

Mr. Lascelles, who recently returned from meetings in the Middle East, said he couldn't discuss the names of potential buyers of Canadian securities because of confidentiality agreements. But he added: "There certainly is a good amount of appetite. It's more than an anecdotal situation. It's a common theme that many countries and central banks are expressing."

While foreign investors chasing growth may still choose to put their money in emerging markets, Canada appeals to sovereign debt holders looking for stability. "The main thing is that Canada is very safe," Mr. Lascelles said. "For these bond investors, they just want to know that they are getting their money back."



An Investor's Guide to Understanding the Economy:

  • Part 1: How the money in the economy is managed
  • Part 2: How inflation works
  • Part 3: Avoiding the deflationary spiral
  • Part 4: How much money is too much money?
  • Part 5: How markets and currencies work
  • Part 6: How interest rates affect your investments


Over the past 12 months, international investors have purchased a net $65-billion of Canadian bonds, a figure that's almost double the previous record based on data going back a couple of decades, he said.

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Canada's debt has the highest rating possible of triple-A, a status it reached in 2002. It's one of only 18 countries with that rating and one of only four outside Europe (along with the U.S., Australia and Singapore).

"We certainly view Canada as having our highest rating of AAA. Our outlook is stable, which means we don't see that changing in the near term," said Nikola Swann, a credit analyst with Standard & Poor's in Toronto.

The country's triple-A rating is "rock solid" at a time when that of the U.S. and the U.K. are under close scrutiny, and Germany and France face the prospect of a sliding euro, Warren Lovely, government strategist with CIBC World Markets Inc.'s Macro Strategy Group, said in a report yesterday.

"As a sovereign debt crisis swirls, [Canada]s relative standing has strengthened further. Simply put, highly rated Canada offers safe harbour in today's global debt storm."

That relative strength was evident when looking south of the border this week. Higher-than-expected yields amid lower-than-average demand in U.S. Treasury auctions demonstrated that investors are becoming more selective.

A flight to quality in the global markets would likely create foreign demand for federal debt and Canada Mortgage Bonds, but it's less clear whether the move would extend to provincial bonds, Mr. Lovely said.

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Ottawa is expected to have erased almost all of the federal deficit by 2015, whereas the U.S. will likely still be running a deficit in the neighbourhood of 4 per cent of GDP. Canada, Mr. Lovely says, is one of the few countries in the world to have lowered general government debt as a percentage of GDP over the last decade.

***

The Scorecard

Canada and Australia look to be the healthiest economies when measured in terms of growth and government debt.

Net Debt

Real

Nominal

10-yr

Current

GDP

GDP

2011F

Chge

Rating/Outlook

%

%

% of GDP

S&P

North America

Canada

2.5

4.4

36

-9

AAA

Stb

United States

2.6

3.6

72

37

AAA

Stb

Other G7

France

1.5

2.2

67

31

AAA

Stb

Germany

1.7

1.9

58

21

AAA

Stb

United Kingdom

1.7

2.8

70

47

AAA

-ve

Japan

1.9

0.7

113

46

AA

-ve

Italy

1.3

2.3

103

8

A+

Stb

Other Distressed Europe

Spain

0.3

0.4

49

7

AA+

-ve

Ireland

-0.6

-1.0

49

36

AA

-ve

Portugal

1.2

1.8

69

38

A+

-ve

Greece

0.4

2.7

101

8

BBB+

-ve*

Other

Australia

3.0

5.1

2

-5

AAA

Stb

Notes: * ratings on negative watch

Source: CIBC World Markets; OECD Economic Outlook

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