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Ontario Health Minister Deb Matthews, left, with Premier Kathleen Wynne at Queen's Park. Ms. Matthews is set to take over the treasury board as Ms. Wynne shuffles her cabinet in the wake of the recent provincial election.

Moe Doiron/The Globe and Mail

The warning to Ontario by a major U.S. credit ratings agency is a shot across the bow that threatens a full-scale downgrade.

The fresh report by Moody's Investor Service late Wednesday wasn't that surprising given the finances of Canada's most populous province, but it was the first move since Premier Kathleen Wynne's re-election and lays out the stakes for her new majority government.

"The risks are clearly to another downward ratings adjustment," chief economist Craig Wright of Royal Bank of Canada said Thursday.

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As The Globe and Mail's Adrian Morrow reports, Moody's changed its outlook for Ontario to "negative" and warned of a downgrade.

"The expected path to balance and stabilization of the debt burden, in our opinion, faces greater challenges than before," Moody's said.

Ontario, where a throne speech was to be delivered Thursday, plans to miss its short-term deficit targets, though has pledged to meet its original timeline.

Economists, though, have warned of the difficulty given the province's weak economic outlook, raising questions about the ability to balance the books.

"Ontario's newly elected majority Liberal government will deliver a throne speech today with a long-term plan that will echo much of what was outlined in this year's budget," said senior economist Robert Kavcic of Bank of Montreal, referring to the proposed budget that sparked the election and is expected to be re-introduced.

"With that in mind, Moody's came knocking last night, slapping a negative outlook on the province's credit rating."

Ontario's fiscal 2014-15 deficit is projected at $12.5-billion, or 1.7 per cent of gross domestic product. The ratio of net debt to GDP is at about 40 per cent, projected to rise to 40.5 per cent and then begin to pull back in the 2017-18 fiscal year.

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Both Mr. Kavcic and Mr. Wright pointed out that Standard & Poor's, one of the other major U.S. agencies, can be expected to pass judgment soon.

"The fiscal plan was always at risk due to the challenge in terms of containing spending," Mr. Wright said.

"The slippage presented in the last budget obviously played into these concerns. Now we await S&P. They have had a watch on for more than two years. Typically a decision would have been taken by now but the election likely delayed it somewhat."

A downgrade would boost Ontario's borrowing costs, but it's hard to put a number on it because markets have already priced in expectations of a move by S&P, Mr. Kavcic said.

Mr. Wright agreed, adding that the province will also, at some point, face greater costs, regardless.

"That would not be a simple calculation as it would depend on many things, including: the maturity profile of the debt, the existing rates paid on debt rolling over, etc.," Mr. Wright said.

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"I would think the bigger worry for all governments (and debtors more generally) is the outlook for the risk free rate of interest, which at some point will be rising from near historic lows."

An all-out move by Moody's would put Ontario below Quebec and the Atlantic provinces, Mr. Kavcic said, while a downgrade by S&P would bring the provincial rating in line with Quebec, Nova Scotia and New Brunswick.

"The bottom line is that with two credit ratings agencies now knocking, the province of Ontario needs to soon establish some credibility on its plan to control spending in the years ahead," he warned.

RBC economists project Ontario's economy will grow by 2.3 per cent this year and 2.8 per cent in 2015, much better than the showing last year and the year before.

Unemployment, however, will stubbornly remain at about the 7-per-cent level.

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