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 NEW YORK, Dec. 18 /PRNewswire/ -- Moody's Investors Service today issued the following special report entitled "Constitutional Developments in Canada -- A Credit Quality Perspective":
 On Sept. 24, 1991, the federal government released a discussion paper that proposes wide-ranging amendments and fundamental changes to Canada's constitutional and administrative arrangements. Since that time, Moody's has been reviewing the various elements of the package and held numerous discussions with federal and provincial officials in an effort to seek clarification and better understand potential credit implications.
 As a service to investors, the following Moody's Special Report briefly reviews some of the paper's key proposals, and discusses credit quality considerations for the provinces and others that arise from these proposals. Since the federal government's paper is designed to initiate a new round of public consultations, and is expected to lead to a formal set of proposals next spring, the credit implications of these proposals are purely conceptual. None of our Canadian ratings are under review in connection with this phase of the constitutional process. Nevertheless, the discussion paper represents the federal government's current thoughts regarding constitutional reform, and it provides a national focus for ongoing constitutional discussions and analysis.
 The new initiative of the federal government launched on Sept. 24 represents the beginning of another round of constitutional negotiations for Canada and, in many respects, is a response to the June 1990 defeat of a constitutional amendment package -- the Meech Lake Accord -- whose main objective was to respond to grievances expressed by the Province of Quebec. The scope of the current initiative is significantly broader than what was contemplated in the Meech Lake Accord, but as a discussion paper, it does not represent the definite position of the federal government. Rather, the Sept. 24 proposals will be the subject of extensive public consultations and hearings over the next few months, following which the federal government is expected to issue a more definite unity package.
 Overview of Proposals and Potential Credit Considerations
 The proposals contained in the new document can be grouped in two broad categories. The first group is comprised of proposals that address current criticisms from various groups in Canada, which are directed at the existing constitutional framework; the second group is aimed at improving the overall efficiency and competitiveness of the Canadian economy. Credit considerations arise primarily from the latter set of proposals.
 Proposals Addressing Current Criticisms
 In contrast with the Meech Lake Accord, the federal government's current proposals attempt to deal not only with Quebec's aspirations, but also with the disenchantment expressed by other regions and minorities of Canada. For instance, in addition to amending the Constitution to recognize Quebec as "a distinct society," fundamental reforms to the upper House of Parliament -- the Senate -- are also proposed, primarily as an attempt to respond to Western Canada's desire to have greater influence over the federal Parliament. Senate reform and other changes directed at Canada's political institutions would introduce additional checks and balances to the Canadian parliamentary system. Although these changes may dilute somewhat the authority of the government in power, they would not significantly erode the governability of Parliament, particularly with regard to its ability to enact appropriation legislation or any measure pertaining to budgetary actions.
 Economic Proposals
 As noted, the second group of proposals is aimed at improving the overall efficiency of the Canadian economy by removing structural impediments, eliminating duplications of effort at various levels of government, and by better coordinating the economic policies of the federal government and those of the ten provinces. While it is premature to draw any final conclusions from the Sept. 24 discussion paper, three of these economic reform proposals do raise important credit considerations for the provinces.
 The first, which is at the center of the government's economic reform initiative, is the proposal to eliminate inter-provincial trade barriers that currently obstruct the free movement of goods, services and labor across the country. Recent independent studies suggest that there are many such barriers in Canada. Many of these barriers are in the form of procurement practices by provincial governments which often favor local over out-of-province suppliers, even at additional costs, as part of their regional development efforts. The credit quality implications arising from the removal of inter-provincial barriers are two-fold. First and foremost, all provinces would experience important savings on the expenditure side arising from lower procurement costs of goods and services. Some estimates suggest that, if these barriers were removed, public sector savings could represent between 1 percent to 1.25 percent of the country's total economic output. However, the positive impact of this change on the financial position of provincial governments could be partly offset in some provinces if the elimination of barriers were to require structural adjustments in specific regions or industries which, traditionally, have benefited from protective trade practices. If it occurs, this process of structural adjustment may affect, at least temporarily, the tax base of some provinces and put upward pressure on their social support programs.
 The second area of reform that could have an effect on the financial position of the provinces relates to federal proposals that give provincial governments exclusive jurisdiction in an increased number of areas. Areas from which the federal government is prepared to withdraw include labor market training, tourism, housing, forestry and mining. Although current federal spending in these areas is very small in relation to the federal budget, federal spending cuts not offset by changes in the financing or taxation arrangements between the two levels of government could lead to noticeable financial pressures for some of the smaller provinces. More generally, it should be noted that any reallocation of powers between the federal government and the provinces that emerges from the current round of constitutional reforms could have important credit implications, depending on the financing arrangements agreed to as part of the reallocation.
 A third area with credit implications for the provinces relates to enhancing the coordination of federal and provincial fiscal policies and, in turn, coordination of fiscal policies with monetary policy. In response to recent cases of conflicting macro-economic policies across governments, the federal document proposes a series of steps to strengthen coordinating mechanisms. The proposed solution includes the introduction of common accounting practices and a fixed annual cycle of federal/provincial fiscal consultations and budget presentations. Of perhaps greater importance from a credit quality standpoint, however, is the proposal that common guidelines be introduced for the conduct of fiscal policies; it is anticipated that these guidelines would include some type of balanced budget requirement over the course of a business cycle. Provided that the central government remains committed to responsible fiscal management, and that it is successful in obtaining the support of the provinces, such fiscal guidelines and greater coordination of macro-economic policies could produce positive results from the perspective of credit quality.
 The discussion paper put forth by the federal government on Sept. 24 represents the most comprehensive constitutional reform initiative undertaken since the country was created in 1867. As noted, some of the proposals raise important credit considerations for the provinces, although the overall net impact on their financial position cannot be assessed until formal and more detailed proposals are presented. Moreover, several proposals are likely to be amended as a result of public consultations. A new and more definite set of federal proposals is expected in the spring, after which a period of intense federal- provincial negotiations will likely begin. The table below presents a tentative schedule of key events pertaining to Canada's constitutional discussions, the release of federal and provincial budgets, and other financial matters.
 Anticipated Events
 Fall to end of 1991 -- Country-wide consultations on constitutional reforms undertaken by Joint Committee of Parliament.
 Early part of 1992 -- Consultations continue through the Joint Parliamentary Committee and five major conferences.
 February -- Release of federal budget; consultations conclude.
 March-April -- Report of the joint Committee to the federal government; publication of the federal government's white paper on constitutional reforms; renegotiation, or possible extension, of the Equalization payment agreement for the receiving provinces.
 March-May -- Release of provincial budgets.
 April-Fall of 1992 -- Expected period of intense federal/provincial negotiations on constitutional reforms.
 Oct. 26, 1992 -- Tentative date for a referendum in Quebec on its constitutional future.
 -0- 12/18/91
 /CONTACT: William Streeter, 212-553-5823, or Yves Lemay, 212-553-4384, both of Moody's/ CO: ST: IN: SU: ECO

GK-KW -- NY052 -- 3491 12/18/91 14:44 EST
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