26 February 2016

Things are THAT bad #nlpoli

David Thompson is an independent economist in the same way that Jerry Earle and Wayne Lucas are independent human resource consultants.

But the problem isn’t that CBC couldn’t make a factual statement in the first three words of a news story.

Nor is it a problem that Thompson recently visited the province at the expense of a public sector union and met with the Premier to offer some helpful “independent” advice.


The problem is that Thompson simply didn’t know anything about the province and the state of the government’s finances.

His entire message was that the government didn’t have a problem, really.  That’s the implication of his “take a breath” comment.

Then Thompson said we could raise a few bucks by jacking up some taxes without a problem.  Half-way to problem solved, or thereabouts, as Thompson would have it.

And - here’s the kicker -  anything else, like saying cutting spending and laying people off would indeed bring on the apocalypse.

To see the extent to which Thompson was just out to lunch, take a look at what happened a couple of days later. The Telegram’s James McLeod broke the news that the province has raised a total of $2.7 billion since last spring in 60 and 90 day bonds.  The story came out of an interview with Premier Dwight Ball.  McLeod notes $535 million in longer term debt the province has incurred since November, as CBC’s Peter Cowan also reported earlier in the week.

“Based on the temperature [in the market] right now,”  Ball told McLeod, “we have not seen an appetite for anyone in the domestic [i.e. Canadian] market to take on the borrowing needs that we need as a province, based on where we are today.”

The reason for this is a bit complicated, as Uncle Gnarley noted on Thursday in a nicely-timed coincidence. Low interest rates make lenders unwilling to commit to long-term loans where the return is negligible. The government might be able to float about a half million in a combination of a three year term and a 31 year term but those are rare.

What’s more, the amount of long-term money available is exceedingly small compared to the government’s immediate need – more than $2.0 billion in cash this year alone – coupled with its long-term need for Muskrat Falls (somewhere between $3.0 billion and $5.0 billion).

The government is thus forced to go to the short-term markets to solve cash flow problems. That’s not unusual and there have been plenty of comments about cash-flow problems floating around certain circles in St. John’s since last year.  The difficulty for the province right now, as Des Sullivan (Uncle Gnarley) notes, is that there isn’t a lot of short-term money available either.

“Sources familiar with the issue explain that the Canadian bond market, especially for the smaller provinces, is very ‘illiquid’, right now,” Sullivan noted. “Not just Newfoundland and Labrador, but at least two other provinces have not completed their long-term borrowing programs, this year. The situation, in part, maybe a matter of timing and strategy; every borrower wants the lowest possible rate of interest. But, it is clear that provinces, especially the smaller ones, will have to check their appetite for debt.”

The short-term bind market is also highly risky.  Rates may change rapidly.  That would make the deficit problem worse in the near term. The dollar exchange rate also makes lenders reluctant to get involved with Canadian debt. 

Then there is the unique situation of this province. According to Sullivan, the “problem is, as one source describes, liquidity for NL bonds is worse than for other provinces.”  That means there isn't as much money available to this province as might be available to others and the competition among the traders is less since there aren’t a lot of them willing to trade in Newfoundland and Labrador paper.

Ball and Sullivan are saying precisely the same thing. Both noted that the fact the provincial government hasn’t been in the bond markets for a while makes it a bit harder again for the government to raise money.  SRBP would add to that the warnings sounded by bond raters about the government’s spending program going back to 2009. 

Tom Marshall acknowledged that year that at least one of the raters had questioned the sustainability of the government’s spending at that point.  A couple of years later,  one of the bond raters flagged the viability of Muskrat Falls in light of the changing market.  And then most recently,  the province has seen three warnings from three different bond raters.

The fact that Ball and Sullivan are saying the same thing might surprise Des who thinks that Ball just doesn’t get the size of the problem the province faces.  If Ball didn’t before now,  McLeod’s interview makes it much more clear that Ball has a handle on things. 

And all of this explains why two former Premiers and a former senior cabinet minister have spoken publicly over the past couple of weeks to give Ball a stern warning.  The situation cannot continue for very long.  As Sullivan noted, “a further decline in government revenues (i.e. HST and oil royalties), or a downgrade by the rating agencies will reduce, even further, the province’s access to the long-term debt market.”

Put the markets to one side.  No one can control those.  All of this really boils down to what’s in the budget.  If the government gets it right, the odds are better for the long term.  But if they take bad advice, like say the stuff you get from “independent” economists,  the province could be in a very desperate state very quickly.