Canadian Markets Stand Steady Despite `No' Vote

Predictions of turmoil in the stock market, foreign-exchange market, and the economy - if Canadian voters turned down constitutional reforms - were exaggerated

THE sky did not fall.

Despite predictions of dire economic damage to Canada's economy if the nation did not vote "yes" to a plan for constitutional renewal, almost a week has passed without calamity following the massive "no" vote in the referendum Oct. 26.

The gloom and uncertainty that presided over downward-gliding Canadian stock markets is gone. Market indexes are sharply up. The value of the Canadian dollar, which had been driven down on international currency markets prior to the vote, has been steady.

"I think that the anticipation of the referendum result was much more severe than the aftermath," says Carl Weinberg, chief economist at High Frequency Economics, a New York economic research firm. "It's the same government, the same Governor [John] Crow sitting at the Bank of Canada. The fundamentals are now winning this battle and the markets are using this as an opportunity to retrace all of the adverse speculation that had held them back."

Bond-rating agencies like Moody's Investors Service Inc. and Standard & Poor's Corporation were muted in their enthusiasm, vowing to keep an eye on large provincial deficits and sharply growing public debt levels. But that hardly dampened the enthusiasm of businessmen and investors relieved at the near-term results.

"I don't think [the `no' vote] was a slap at national unity at all," says Michel Decary, Quebec vice president of the Canadian Federation of Independent Business, which represents 83,000 businesses. "Any negative perception out there in the international market will be short-lived because the message will go out to them that people want to get on with business."

Other analysts agree that, instead of further dividing the country, the "no" vote by 6 of 10 provinces (including Quebec) has at least temporarily unified Canadians around the idea of squelching constitutional wrangling and getting on with fixing the economy. That attitude has buoyed markets - along with a steady monetary policy that has left the currency stable.

Mr. Crow, who presides over Canada's central bank and sets interest rates on Canadian bonds and loan rates to banks, has received generally high marks for his measured response to attacks on the currency by speculators early last month.

First, he ratcheted short-term interest rates up from 4.9 percent Sept. 3 to a peak of 7.9 percent in mid-October. Since the vote the rate has been lowered from 7.3 percent to about 6.3 percent. The value of the dollar remained steady at about 80 United States cents before and after the vote.

Analysts pointed out, however, that the referendum has left a lasting impression on investors and on the economy, possibly slowing the pace of its recovery.

"We got some of the way back again from where all this started," says Mark Chandler, assistant chief economist at the Royal Bank of Canada. "We've recovered, but not all the way. You'll see interest rates fall, but they probably won't get back to 4.5 percent. I think we can get back to 5 percent."

Mr. Chandler cites concerns over Canada's deteriorating trade surplus and its growing current-account deficit that was highlighted when Standard & Poor's downgraded $9 billion of Canadian long-term bonds Oct. 14. Moody's announced Oct. 28 that it would review Canada's foreign-currency debt for possible downgrade because of the potential for "further disintegration of Canadian national unity."

"In the long term there are some questions about Canada's underlying problems," says Mr. Weinberg. "Deficits, particularly at the provincial level, are a problem."

To the relief of all but the debt-watchers, politicians have declared a moratorium on constitutional matters and have promised to focus on boosting the economy instead. The problem is that there is little if any room for a rise in government spending in order to stimulate the economy.

The federal debt stands at $450 billion, and provincial debt is expected to rise to $171 billion in this fiscal year from $150 billion in fiscal 1991-92.

Jacques Parizeau, leader of the separatist Parti Qucois that led the fight for "no" in Quebec, reveled in the flak the Royal Bank received for a controversial report it issued during the referendum campaign predicting severe damage to the economy, including the loss of 720,000 jobs, if Quebec separated from Canada. The bank was accused of fearmongering.

About the same time Prime Minister Brian Mulroney tore apart a copy of the constitutional agreement to dramatize what would happen to the country if there was a "no" vote.

The stock markets plunged. The dollar fell. But neither the report or the prime minister were believed by the voters.

Parizeau since the vote has said it reveals deep, irreconcilable differences between Quebec and the rest of Canada. These will lead to a sovereignty vote within a year or two, followed by independence, he predicts.

Weinberg sees the province's large public debt as the main obstacle to Quebec separatists' quest for nationhood.

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