Ukraine Sovereignty Bond: In the Best Interest of Canadians?
Cash-strapped Canadians are being offered a regular five-year Government of Canada bond at a 3.3% rate of return, far lower than the current 6.9% inflation rate.
Last week, the Government of Canada launched a $500 million Ukraine Sovereignty Bond, which was first announced by Prime Minister Justin Trudeau in October 2022.
Participating financial institutions, which include all of Canada’s big five banks, have partnered with the government to offer the bond to interested Canadians in denominations of $100. The bond is fully backed by Canada’s AAA credit rating.
Purpose of the Bond
“The funds will support the Government of Ukraine to continue to operate in the face of Russia’s illegal invasion, including by providing essential services to Ukrainians, such as pensions, the purchasing of fuel before winter, and restoring energy infrastructure,” the government said.
Regarding the transaction details of the proceeds between Canada and Ukraine, those negotiations have yet to conclude. It is assumed that all funds from the bond issuance will be fully transferred to Ukraine through its International Monetary Fund (IMF) Administered Account.
It is expected that the proceeds will be given to Ukraine in the form of a loan. The money will “provide Ukraine with “general budgetary support, such as to help sustain basic government operations including essential services,” the government stated.
The cash from the bond is in addition to the $2 billion in direct financial assistance Canada has sent Ukraine since Russia’s invasion began. As well, Canada has committed another $2.5 billion in military, humanitarian and development assistance to Ukraine by the end of the year.
As of 2021, Ukraine and Russia have a high level of corruption within government and society, ranking 122 and 136, respectively, out of 180 countries.
Risky Investment?
Fitch Ratings, a leading provider of credit ratings, updated its rating of Ukraine to a CC in August 2022. A rating of CC indicates that the entity is currently highly vulnerable and near default. Moody’s and S&P Global Ratings indicate that a default is likely in Ukraine based on its credit rating of the sovereign nation.
The Government of Canada seems to understand the risk associated with the details of the loan, as it has listed “Should bondholders be worried that the Government of Ukraine will not pay them back?” as a frequently asked question on the bond’s landing page.
In the event Ukraine defaults, Canada assumes all credit risk associated with the loan and timely repayment to bondholders will be guaranteed by the Government of Canada.
Announced on Tuesday, the Bank of Canada incurred its first loss in its 87-year history. The bank lost $522 million in the third quarter of 2022 as a result of rapidly rising interest rates.
Canadians Low on Cash
With a dire economic environment for Canadians, one has to pose the question of whether this bond issuance is in the best interest of Canadians, let alone whether the rate of return is a desirable investment option.
Since June, inflation has decreased from 8.1% to 6.9% which is seen as a positive sign. However, most of the decline reflects a drop in gasoline prices across the country. Inflation in Canada is broad-based and about two-thirds of the components that derive the consumer price index (CPI) have risen by over 5% in the last year.
Bank of Canada Governor, Tiff Macklem has indicated that “[Canadians] will come to expect persistently high inflation, which will require much higher interest rates and potentially a severe recession to control inflation.”
Besides rising costs based on Canada’s CPI and a looming recession, other statistics indicate that Canadians are having a hard time affording basic needs.
Household Savings Rate is down from 8.1% to 6.2% in the last quarter
Consumer Spending is down $3.08 billion in the last month
In addition, the Bank of Canada expects interest rates to rise further in the near future. Rising interest rates do have a direct impact on Canadians. For example, rising rates will increase variable rate mortgage payments, further reducing the savings of citizens.
We pose the question, is the Ukraine Sovereignty Bond in the best interests of Canadians?
