Joffe, Marc, "Provincial Solvency and Federal Obligations", Macdonald-Laurier Institute, (October 2012), p. 52.

Abstract: The question this paper tackles is one of whether Canadian provincial interest rates include a subsidy arising from an expected federal bailout. Financial crises, defaults and bailouts all have precedents in Canadian provincial history. In fact, readers may be surprised to learn that half of the provinces received bailouts during the 1930s.

This study determines the existence of potential subsidies by estimating a theoretical interest rate that each province would pay in the absence of a potential bailout. It then compares these theoretical rates to market yields. To the extent that the theoretical rates exceed market yields, the approach suggests the expectation of a subsidy.

JEL Classification: G12, H60, H63, H68.

Keywords: province subsovereign default probability theoretical yield.

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