MNI INTERVIEW: Canada Heading Back To 1990s Debt Wall- Ragan

Canada’s government is in danger of heading for a repeat of its 1990s fiscal crisis and officials are underplaying dangers of a global yield surge, extra pressure on the central bank to tighten, and scarce room to tackle another downturn, former Finance Canada and Bank of Canada adviser Chris Ragan told MNI.

Federal and provincial governments have time to stabilize things but they must get over a sense of complacency, Ragan said. Today no federal party advocates a balanced budget -- there hasn't been one since 2008 -- and Prime Minister Mark Carney instead touts Canada's triple-A credit ratings and low debt-to-GDP versus G7 peers.

“But it's also true that we're 20 points higher than we were just before the financial crisis, and we're not right there, but we are approaching that danger zone of what we experienced in 1995," Ragan said. "I don't think it's just relative to other G7 countries that matters.”

Debts of federal and provincial governments are 74% of gross domestic product, Ragan estimates, up from about 50% before the 2008 global financial crisis. Canada faces "forced austerity" if that ratio approaches 95% he said, adding that if the present trajectory is maintained it is on course to reach the 99% seen in the 1990s.

YIELD LIFT

Federal bond yields are closely linked with Treasuries and that creates further risk, Ragan said. "We don't know whether the U.S. will turn around their ship. I kind of don't think so anytime soon.”

The 10-year bond yield has climbed about 50 basis points this year versus 115bp for a similar U.S. Treasury, increases that could become more costly if investors shun G7 bonds, Ragan said. (See: MNI: Canada Studied Vulnerability To Fiscal Risk Premium)

Carney has pledged to shrink only the deficit as a percentage of GDP and to balance the operating budget in the next few years while running deficits for military equipment and infrastructure. The power of a fiscal anchor is willingness to stick with it Ragan said, but so far officials are gambling solid growth and low interest rates will do the hard work.

MONETARY SQUEEZE

Higher spending will pressure the Bank of Canada towards higher interest rates, Ragan said. “High government debt complicates monetary policy, even if there's nothing nefarious coming from the government, even if there's no challenge to the independence of the central bank," he said. "The higher government debt becomes, the more bondholders come to expect that maybe inflation will be used.”

It's unlikely Carney -- a former BOC chief -- will directly put pressure Governor Tiff Macklem as Donald Trump has on the Federal Reserve, Ragan said. 

“I am cautiously optimistic that the Bank of Canada will in fact maintain its commitment to 2% inflation, and that the government won't engineer with that. But the truth is, we don't know,” he said. (See: MNI INTERVIEW: Macklem-BOC Faces Tough Calls Ahead On Rates)

“If they are doing a whole bunch of new net spending, and they clearly are, then that is pushing up aggregate demand and other things being equal that means central banks are going to have to raise interest rates to keep inflation on target.”

THE EASY PATH

There's room to cut spending, but the options are unpopular even if Carney's economic background makes him a strong candidate to maintain public support, Ragan said. Raising taxes should be avoided because Canada is seeking to lure investment and skilled workers, and a higher federal sales tax is a political non-starter, he said.

Elderly benefits are a good candidate for austerity because it's one of the most expensive budget items and some payouts go to rich households, he said. Military spending will probably rise by CAD100 billion in the next few years, and there's no sign yet of offsetting cuts, Ragan said.

“They are taking the easy path because they know they can much more easily put this on the credit card than they can to raise taxes or cut other spending.”

RPT-MNI: Next Spanish Gov't To Back De Cos For ECB Role

Bank for International Settlements General Manager and former Bank of Spain Governor Pablo Hernandez de Cos will continue to receive support to succeed Christine Lagarde as president of the European Central Bank from any Spanish government to emerge from general elections on Nov 29, sources from the country’s two main political parties told MNI.

In late September, Spain’s Prime Minister Pedro Sanchez publicly announced his support for Hernandez de Cos, and his Socialist Party will continue to do so regardless of the election result, a source in the Spanish government told MNI. (See MNI: Spain To Support De Cos For ECB Head After Initial Doubts) 

The centre-right main opposition People’s Party, which is leading in the polls, would also rally behind Hernandez de Cos as ECB candidate, a source in the party with knowledge of economic policy told MNI. The same source dismissed a press report in which Hernandez de Cos was mentioned as a potential finance minister in a government led by the PP.

Asked about the stance of the far-right Vox party, which polls suggest is likely to be the PP’s junior partner in a governing coalition, the PP said that it held the same view but this was not significant as Spanish legislation grants the prime minister the prerogative in the matter.

MNI was unable to contact any Vox official briefed on the subject.

While Hernandez de Cos’s ECB candidacy appears to be one of the few topics on which the Socialists and the PP can agree on, it is still unclear how they would coordinate should the process to select Lagarde’s successor begin while post-electoral negotiations to form a new Spanish government are still taking place. Reports have indicated that Lagarde could leave her post before her term ends in October 2027. (See MNI: Italy To Press ECB's Lagarde To Clarify Future - Sources )

MNI: Next Spanish Gov't To Back De Cos For ECB Role-Sources

Bank for International Settlements General Manager and former Bank of Spain Governor Pablo Hernandez de Cos will continue to receive support to succeed Christine Lagarde as president of the European Central Bank from any Spanish government to emerge from general elections on Nov 29, sources from the country’s two main political parties told MNI.

In late September, Spain’s Prime Minister Pedro Sanchez publicly announced his support for Hernandez de Cos, and his Socialist Party will continue to do so regardless of the election result, a source in the Spanish government told MNI. (See MNI: Spain To Support De Cos For ECB Head After Initial Doubts) 

The centre-right main opposition People’s Party, which is leading in the polls, would also rally behind Hernandez de Cos as ECB candidate, a source in the party with knowledge of economic policy told MNI. The same source dismissed a press report in which Hernandez de Cos was mentioned as a potential finance minister in a government led by the PP.

Asked about the stance of the far-right Vox party, which polls suggest is likely to be the PP’s junior partner in a governing coalition, the PP said that it held the same view but this was not significant as Spanish legislation grants the prime minister the prerogative in the matter.

MNI was unable to contact any Vox official briefed on the subject.

While Hernandez de Cos’s ECB candidacy appears to be one of the few topics on which the Socialists and the PP can agree on, it is still unclear how they would coordinate should the process to select Lagarde’s successor begin while post-electoral negotiations to form a new Spanish government are still taking place. Reports have indicated that Lagarde could leave her post before her term ends in October 2027. (See MNI: Italy To Press ECB's Lagarde To Clarify Future - Sources )

MNI INTERVIEW: German Industry To Shrink, Re-Focus On Europe

Germany’s manufacturing sector will shrink as a proportion of GDP over the next decade, and will focus more heavily on exports within Europe, though the car industry will remain a major employer and source of tax revenue, the managing director of Berlin’s Max Planck Institute for Innovation and Competition told MNI.

Germany will still have a larger manufacturing sector than many other countries, Dietmar Harhoff noted in an interview. But its auto manufacturers will mainly produce e-vehicles for European markets, and to a lesser extent for the United States, he said, as the country faces a new world of greater international trade barriers and extreme Chinese competition.

“New activities will emerge at the intersection of physical AI, robotics, manufacturing and industrial processes,” said Harhoff, Managing Director of Berlin’s Max Planck Institute for Innovation and Competition. “There will be much stronger R&D expenditure, which you can already see, as well as much stronger value creation in the digital part of the economy that is growing in importance.”

Harhoff cited 2023 research suggesting AI could raise productivity by 30-40% for particular people performing specific tasks, but said the economy-wide impact may be closer to half- to two-thirds of a percentage point over the next 10 years. Germany’s government is introducing open-weight AI models for use in state administration and regulated entities, he noted.

“These are still significant figures in real terms, but nowhere near what has been claimed. In the meantime, in the absence of major European LLM producers, adoption and diffusion are key, particularly in the manufacturing sector in order to raise productivity,” he said.

VENTURE CAPITAL

While state-backed efforts run by such as Germany’s Federal Agency for Breakthrough Innovation (SPRIND), and the Netherlands' National Agency for Disruptive Innovation (NADI) will steer efforts to take full advantage of AI, private players will be key, he said. Germany’s administration is heavily stacked with lawyers and lacks industry experience, Harhoff said, adding that the country’s venture capital industry - currently 0.15% of GDP - would be 60% larger had Berlin followed France in doing more to prop it up.

“We need to pull back from the illusion that the state can finance start-ups from creation to IPO. We need tax rebates or other incentives for private capital. We need more tools to attract global capital,” he said.

A government proposal to reduce employment protection for employees in higher salary brackets would bring greater labour flexibility and help address a shortage of experienced professionals who can help start-ups grow, he said, adding that another measure under consideration by Berlin, to allow ministries with money but not the capacity to use it effectively to transfer it to those which can, would also make sense.

Cooperation within Europe will also be essential if the region is to compete in AI, he said, pointing to SPRIND’s EUR150 million drive to develop the next generation of frontier AI models which supports 10 teams, with only three from Germany, together with two from the UK, two from Switzerland, two from France, and one from Italy.

MNI: Canada Pension Nudge Adds Home Bias Investment Risk-Memo

Canadian officials told the finance minister the government's push for national pension funds to invest more in domestic projects would add to a home bias, contrasting with a legislated mandate to seek the best return on taxpayers' payroll contributions, a memo MNI obtained through a freedom of information request shows.

The memo outlining Francois-Philippe Champagne's briefing for May and June meetings with Canada Pension Plan Investment Board CEO John Graham and Chair Dean Connor noted an April parliamentary hearing where a CPPIB official told lawmakers that the 12% or CAD95 billion of assets invested domestically by the Plan is "well above Canada's roughly 3% share of global investable markets."

"As CPP liabilities and contribution risks (demographics, productivity, aging population) are entirely Canadian, investing more domestically would create concentration risk," the finance department memo said.

Another issue for investing in Canada is that beyond airports there may not be many suitable opportunities. "CPPIB has emphasized the importance of bankable, large-scale projects as well as a transparent market that minimizes regulatory friction," the memo said. Pension managers have looked at things such as infrastructure, energy and digital projects.

Champagne's briefing memo suggested the minister mention "we welcome CPPIB's partnership in advancing nation-building initiatives" and "we continue to look to your leadership on these issues." 

INVESTOR CONFERENCE

Champagne was also advised in the memo to seek "insights on how we can best align federal tools, including the proposed Canada Strong Fund, to crowd in more institutional capital." That fund aims to raise CAD25 billion, but the government hasn't laid out many details.

The eight-page document notes the "CPPIB is an arm's length Crown Corporation with the mandate to invest the assets of the CPP Fund to achieve a maximum rate of return without undue risk of loss." That mandate is set in federal law and the fund's annual report says making changes is harder than a constitutional amendment and a strong protection of its independence. 

"Engagement between the Minister and CPP Investments referenced in the released documents were opportunities to exchange views on the Canadian investment environment and other matters within the Minister’s responsibilities," department spokeswoman Marie-France Faucher told MNI. 

The memo referenced an investor conference Prime Minister Mark Carney held in September where CPPIB officials and the Public Sector Investment Board were listed as hosting partners. 

At the investment conference, Carney said “Canadian pension funds already successfully invest and manage airports around the world. It’s time to bring that same expertise back home to directly benefit Canadians.”

DOUBLING UP

CPPIB at the conference announced the CAD50 billion Maple Fund with Brookfield Asset Management, where Carney worked before entering politics. "Canada is entering a period of new ambition to advance major projects and build for the future, creating compelling investment opportunities across the country. CPP Investments has the capital, long-term investment horizon and expertise to pursue these opportunities," Graham said in a statement at the time. 

Carney's Privy Council Office said in a statement "in the case of the Investment Summit, invitations were selected with co-hosts CPP Investments and PSP Investments, based on a shared goal of attracting investment in Canada. The Office of the Ethics Commissioner was consulted on this process." 

CPPIB Chief Public Affairs Officer Michel Leduc said in emailed comments to MNI that the corporation regularly meets government officials but that governments do not direct its investment decisions.

“We are, in fact, deliberately overweight Canada relative to its share of global markets because we know the market well and our investments here deliver solid, long-term returns," Leduc said. "There was no discussion with the federal government about the Maple Fund prior to the announcement.”

The CPP was created in the 1960s and in the 1990s had to double payroll contribution rates to 9.9% in part because of an aging population. It also adopted more independent governance that "reduced moral hazard, limited the use of reserves for non-pension purposes," according to a National Institute on Ageing report. In earlier times provincial governments borrowed at non-market rates from fund surpluses.

INVITE: MNI Connect VC with CBO's Phillip Swagel On Oct 22

You are invited to listen to a livestreamed MNI Connect Video Conference with the Congressional Budget Office, Phillip Swagel.

Details below:

• Speaker: Phillip Swagel, Director of the Congressional Budget Office.
• Topic of discussion: ‘The U.S. Budget and Economic Outlook’
• Date: Thursday, 22nd October 2026, 10 am to 11:30 am ET / 3 pm to 4:30 pm London time.
• This event will be run as a Zoom Webinar and is a public, on-the-record event.

To register please go to: MNI Webcast Registration

MNI INTERVIEW: Yield Jump, AI Bust Are Top Financial Risks-IMF

Rising bond yields, a possible market correction in AI and cyber security are top risks to financial stability, though stress testing indicates banks can withstand an AI crash, the IMF’s Deputy Director of Monetary and Capital Markets told MNI.  

“Financial stability concerns are still elevated,” Athanasios Vamvakidis said in an interview at the Fund. “We see a positive correlation between debt levels of government deficits with yields. Related to that, the market is concerned about potential absorption, given the huge issuance that is coming from sovereigns.”

One big worry for Vamvakidisis that unlike the aftermath of Covid many countries including the United States have decreased ability to react to new shocks. High deficits would likely impede fiscal expansion and above-target inflation limits room for monetary easing, he said. 

Central banks including the Federal Reserve can protect financial stability by delivering on their price stability mandates, Vamvakidisis said. 

CREDIBILITY DOUBTS

“We have actually seen cases in recent months where when the market questions the ability of central banks to meet the inflation target, we see long-term yields increasing,” he said.  “So central bank credibility, central bank independence, sticking to the sticking to the policy mandates, clear communication are extremely important in this respect. Meeting the inflation target is the best way for central banks to contain a further rise in yields.”

For now, "everything points to the need to tighten monetary policies,” he said. “It would be more of a shock if central banks create doubts on their willingness, their ability to deliver on the inflation mandate.”

So far the rise in yields has not been accompanied by a major tightening of financial conditions or a sharp deterioration in risk appetite, Vamvakidisis said alongside the release of the fund's Global Financial Stability Report. 

CIRCULAR FINANCING

IMF stress testing finds global banks appear to have enough capital to withstand an AI crash even with a significant number of institutions vulnerable to that scenario, particularly those with strong links to non-bank financial institutions, he said.  

The report flags “circular financing” in the AI sector as one key vulnerability. Another problem is the increase in leverage and less liquid investments across the financial landscape. 

“Higher borrower leverage and growing contingent liquidity risks faced by private direct lending funds could sharply curtail credit when financial conditions tighten, a test the sector has not yet faced,” the IMF reported.