CEBA loan forgiveness would risk 'upward pressure on interest rates': Desjardins

Desjardins estimates more than half of businesses in Canada received the CEBA loan. (THE CANADIAN PRESS/Adrian Wyld) (The Canadian Press)

Delaying or forgiving Canada Emergency Bank Account (CEBA) loans would have significant financial consequences for the federal government, warn economists at Desjardins.

Ottawa distributed $49.2 billion in emergency loans in a bid to help nearly a million businesses survive the economic impact of the COVID-19 pandemic.

Business groups have called for an extension of Thursday’s deadline to repay the loans and receive partial forgiveness of up to $20,000, or one-third of the loan. After the deadline, the debt is rolled into a three-year loan with a five per cent annual interest rate.

Businesses may also refinance the loan with a financial institution, giving them until March 28 to set up payment while remaining eligible for partial forgiveness.

“If the federal government were to delay or even forgive outstanding CEBA loans, it would contribute to larger deficits and higher debt, risking additional upward pressure on interest rates,” Desjardins economists Randall Bartlett and Florence Jean-Jacobs wrote in a report on Thursday.

They estimate more than half of businesses in Canada received the loan, a share that's highest among smaller businesses, and in the accommodation and food services sector.

The Canadian Federation of Independent Business (CFIB) and Restaurants Canada are among the groups calling on Ottawa to give CEBA loan holders more time.

“For many businesses, CEBA will be the straw that breaks the camel’s back,” CFIB president Dan Kelly said in a statement on Wednesday. “I believe the government will regret the decision not to grant more time as small businesses fail and default on their entire loan.”

Canadian business insolvencies in the third quarter of 2023 were up 41.8 per cent from a year earlier, according to the Office of the Superintendent of Bankruptcy, surpassing pre-pandemic levels.

The Bank of Canada left its key lending rate in place last month amid signs of a slowing economy. Analysts expect the central bank to begin easing borrowing costs in the spring.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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