15 September 2016

Prov gov finances headed south #nlpoli

The Government of Newfoundland and Labrador is offering its bonds on the American market, according to Bloomberg News.  VOCM reported it locally on Wednesday.

The provincial government hopes that its high interest rates will attract investors.  "We are providing some of the highest yields in the country among provincial borrowers,"  deputy finance minister Donna Brewer told an investors conference in New York a couple of days ago.

Now you know what Anne Squires sounded like after someone gave her Ron Ellsworth's telephone number.

While it is true that the government bonds carry the highest interest rates,  they are that way because the credit rating is the lowest among the provinces.  People will only take the bonds if the government promises extra profit.

The provincial government is looking south of the border for cash because Canadian markets are tightening up.  That's the real story here.  There aren't a lot of folks in our end of the capital pool at the best of times.  We already had the news earlier this year that the government has been having trouble finding enough long-term debt to make ends meet.  They have been relying on more and more short-term debt.

If the government sticks to its current plan, they will need a lot of money over the next decade.  The government  will need upwards of $10 billion.  We aren't the only Canadians heading down south looking for money. What money might be interested in coming to Canada can go come to Newfoundland and Labrador or go to Ontario. The competition will be stiff, therefore, since people likely to invest in Canada know already our provincial government is already in a dodgy financial condition.  Ontario's something they know and trust.

If we can get the cash we need,  adding to our debt load in foreign currency is going to carry more problems on top of the ones the massive amount of new debt brings anyway.  The biggest one is the exchange rate.  The Canadian dollar is not forecast to do any better against the American dollar than it is now.  That means every American dollar we borrow is going to add something closer to a buck and a half to the public debt.

Then there is the impact we get from an exchange rate that isn't steady and predictable. The government could budget for one amount of debt and debt servicing and wind up with a much bigger number as the exchange rate moves around.

The government has been through this before.  Coming out of the 1970s and 1980s,  the government had built up a sizeable chunk of debt in American dollars,  Japanese yen and even the other Deutsche Mark. In the great recession of the early 1990s,  the government made a strategic decision to start converting as much of that debt as it could to Canadian currency. It was part of a long-term strategy to reduce the public debt that carried on through Roger Grimes' days as Premier.

Mismanagement of public spending over the last decade - not even counting the monstrously stupid Muskrat Falls project - not only destroyed 20 years of hard work paying off debt but also made the situation worse than it used to be, by an order of magnitude.  The current administration is now in such a state that they have to go to foreign capital markets again, something we haven't had to do since the 1980s.

There is little good news in this development.  The provincial government's debt situation will be significantly worse than it appeared even a few months ago.  They may have to raise interest rates to attract money.  There is still a possibility the government will not be able to raise the money it needs. Indeed, there is a very good possibility the markets will balk at putting money into a government so severely in debt in comparison to other provinces and with a project in Labrador that  - as it appears now - simply doesn't work.

Investors can look at the government's financial problems and see how bad it is, even if the government tries to pretend otherwise.  The Bloomberg story quoted one recent credit report on the provincial government.  We may well see others coming before Christmas.  No one should be surprised if the next batch of credit ratings lower the province's rating or outlook yet again.