America’s credit rating got downgraded. Is Canada’s next?

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Yali N’Diaye is a former financial reporter with Market News International who covered financial regulatory reform after the global financial crisis, including reliance on rating agencies.

As markets absorb the recent downgrade of U.S. government debt by Moody’s, an uncomfortable question emerges: Is Canada’s pristine triple-A credit rating now under threat?

The accumulating evidence suggests that while Canada’s triple-A rating isn’t in immediate jeopardy, its foundations are weakening. The financial stakes are significant – higher borrowing costs would add billions to Ottawa’s interest payments, even before a formal downgrade occurs.

Canada still has significant strengths, which would have appeared more obvious in recent years but that should no longer be taken for granted in the current global environment.

Rating agencies continue to praise Canada for its institutional strength. When Morningstar DBRS affirmed the Government of Canada’s triple-A rating in February with a “stable” outlook, it cited a “stable liberal democracy with sound policy management.”

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This assessment remains consistent across all major rating agencies, which all have a “stable” outlook.

For context, rating agencies typically signal growing concern by first changing their rating outlook from “stable” to “negative.”

Another strength is Canada’s net debt position – which accounts for financial assets available to meet debt obligations and remains low compared with other G7 countries at 12.5 per cent of GDP.

But when gross debt is considered, Canada’s 112.5 per cent is substantially higher than Germany’s 65.4 per cent.

Last year, agencies highlighted concerns about Canada’s high general government debt and declining debt affordability – a warning that has only grown more relevant.

Fitch, which already rates Canada one notch below triple-A at double-A-plus, specifically warned against increased government spending when it reaffirmed this rating in July, 2024. In April, 2025, the Liberal Party now in power unveiled a platform with nearly $130-billion in new spending over four years.

“Should the platform be fully implemented,” says a recent Fitch commentary, Canada’s government deficit would reach “3.1 per cent of GDP this year and 3.2 per cent in 2026” – higher than previous projections.

Analysis from the Institute of Fiscal Studies and Democracy characterized the economic assumptions underpinning the Liberal platform as “optimistic” – language signalling doubt about fiscal projections.

Three factors are now commanding rating agency attention: The delayed 2025 federal budget, which has been pushed to the fall, rapidly accelerating program spending and continuing U.S. tariff threats that could disrupt growth assumptions.

While an immediate downgrade remains unlikely, these pressures are accumulating on agency risk dashboards.

Bond investors are unlikely to wait for formal downgrades before demanding higher risk premiums despite Canada maintaining its triple-A status with Moody’s, S&P Global Ratings and Morningstar DBRS.

However, their current “stable” outlooks were assigned before the $130-billion spending plan emerged.

While a formal outlook change would likely await the fall budget, market perception could deteriorate sooner. And that paves the path to a downgrade down the line.

Why it matters: Rating agency judgments remain embedded in asset managers’ investment frameworks. Many institutional investors face mandates restricting the amount of non-triple-A rated debt they can hold, particularly for pension and insurance portfolios.

A downgrade wouldn’t merely be symbolic – it could trigger portfolio rebalancing across global investors, potentially accelerating any increase in Canada’s borrowing costs. (That being said, if only one agency were to move, such rating-related portfolio rebalancing is less likely.)

In the meantime, plenty of near-term catalysts could negatively influence the perception of Canada’s credit trajectory.

Any new commitments on defence spending or tariff retaliation could substantially alter fiscal projections before the fall budget. Canada’s interest in the U.S. Golden Dome military defence network, a costly endeavour, is an example of such spending.

On June 26, the Office of the Superintendent of Financial Institutions will determine whether higher bank-capital requirements are needed, potentially restricting credit availability and complicating economic growth projections.

And when the fall budget finally comes, it will represent the first formal debt-management plan of the Carney era, and a critical test of fiscal discipline versus spending priorities.