A Good Crisis: Canadian Municipal Credit Conditions after the Lehman Brothers Bankruptcy

Subnational governments in several countries struggled to borrow on credit markets during and after the global financial crisis of 2008 and 2009. Canadian municipalities were not immune. They, like many governments, were unable to borrow for a brief period after the Lehman Brothers bankruptcy of 2008. But municipal credit conditions improved markedly after the peak of the crisis. Interest rates plunged, demand for long-term bonds increased, and the investor base expanded. Municipal borrowers did not, however, fare as well as the federal and provincial governments, which saw even sharper declines in interest rates. This paper seeks to explain these developments. It links municipal success to factors underpinning low interest rates and stellar municipal creditworthiness, and attributes the superior conditions of federal and provincial borrowers to volatility in global financial markets and patterns of foreign investment in Canada’s government bond markets. The analysis reveals the resilience of Canada’s municipal borrowers in the face of global credit shocks and the virtues of Canada’s tightly regulated system of municipal borrowing.