Quebec Referendum Jitters Rock Canadian Markets

The Toronto Stock Exchange suffered its biggest one-day decline in six years

INVESTORS in Canadian bonds and stocks, many of them in the United States, were jolted wide awake this week by the sudden realization that Quebeckers may indeed vote Oct. 30 to separate from Canada.

Canada's stock and bond markets were taken on a wild downward ride Oct. 23 led by the Canadian dollar, which fell on world currency markets by almost a full penny against the US dollar. It was the Canadian dollar's biggest one-day drop in three years.

The Toronto Stock Exchange's composite index of 300 leading stocks lost 2.8 percent of its value - its biggest tumble in six years. Early trading Oct. 24 appeared to continue the downswing in the dollar and in stocks and bonds.

The Bank of Canada, the nation's central bank, was reported intervening to try to stabilize the currency.

''I am very confident that international markets and indeed domestic markets are completely assured that Canada will under all circumstances fulfill its obligations,'' Finance Minister Paul Martin said Oct. 23 in the House of Commons.

The statement was apparently aimed at shoring up any concerns by foreign holders of Canadian government bonds that - in the event Quebec voted to separate - they might not be repaid if Canada and Quebec were to feud over who got what share of the nation's debt - $546 billion (Canadian: US$403 billion).

Canadian markets have been reasonably buoyant this year despite a long, slow independence campaign in Quebec. But savvy international investors, who typically watch closely for political stumbling blocks, may have become too comfortable with the conventional wisdom that Quebeckers would vote ''no'' on Oct. 30 to the economic upheaval of separation from Canada.

Poll protests

That apparent complacency was disrupted by three surveys showing that the tide of Quebec opinion, building in late September toward a strong ''no'' vote to separation, has been reversed.

The Canadian dollar began to fall Oct. 20 after an Angus Reid Group poll showed 51 percent of Quebeckers ready to leave Canada. That survey was reinforced Oct. 21 by a Leger and Leger poll showing 50.2 percent ready to vote ''yes'' to separation compared with 49.8 percent for the No.

What may have tipped the markets, however, was an Environics poll faxed to securities firms on Oct. 23 that showed 53 percent support for the separatist cause. Several more polls are due out this week, suggesting further turbulence as markets adjust to new expectations.

Some analysts said the prospect of the sort of economic mess created by the breakup of a formerly stable Group of Seven nation was less than inspiring to conservative holders of Canadian bonds and stocks.

''We've never seen anything like this before ... where a well-to-do, prosperous country could possibly [have one part of it] separate from the rest,'' Carl Weinberg, chief economist with High Frequency Economics in New York told the Toronto-based Globe and Mail newspaper. ''No one has a clue what will happen [Oct. 31] if the 'yes' side comes through.''

Safety of bank accounts

With markets churning, there are signs that individuals are concerned about their bank accounts. Spokesmen for Bank of Montreal and Royal Bank of Canada acknowledged that a significant number of individuals had inquired whether their money was safe. A smaller number, they say, apparently have opted to actually shift their funds to accounts in the US.

In Quebec, separatist leaders Jacques Parizeau and Lucien Bouchard blamed the market's turbulence on federalist leaders Prime Minister Jean Chretien and Finance Minister Paul Martin. The markets, Mr. Bouchard says, were upset because Canada would not agree to smooth Quebec's transition by agreeing to an economic and political union.

Prime Minister Chretien, the federalists leader of the ''no'' forces and the man in charge of keeping Canada united, was attending the United Nations' 50th anniversary celebrations.

He appeared unruffled by the news of the Canadian dollar's slide. ''We have a plan, and its working,'' he said. He was referring to the federalist emphasis on the economic problems that separation could cause.

Nonetheless, the polls seem to dispute that assertion. But some analysts say Chretien's message will be driven home this week if markets continue to decline. The markets, they say, are the most effective messenger to Quebec voters.

''It's an across-the-board meltdown,'' Brian Garvey, a Canadian-market financial analyst in New York said of Oct. 23's trading. ''The market is sending a message to Quebec to expect more of this if you do vote 'yes.'''

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