Bollocks #nlpoli

Kill the wabbit?

Moody’s has changed its outlook on the provincial government’s debt from stable to negative while sustaining the A1 rating it gave the province in July 2019. That, by the way, was a downgrade.

In a statement issued Wednesday, Moody’s said the change in outlook reflects the company’s view that the provincial government’s “credit profile will weaken due to the sharp decline in oil prices and its reduced budgetary flexibility to adjust to this shock. Under Moody's base case, oil prices are expected to average $40-$45/bbl in 2020 before returning to $50-$55/bbl in 2021…”.

Moody’s expects the provincial deficit for 2020 could reach 25% of revenue in 2020 and about 11% in 2021. Previously, Moody’s had forecast deficits of 11%  and 4% respectively for those years.

Moody’s expects the provincial debt will reach 270% of revenue by 2023 with pressure that this will increase after 2023.  In other words, Moody’s doesn’t believe that the government will balance the budget in 2023.

The company said the negative outlook reflects the increasing likelihood that – in the absence of a detailed and proven rate mitigation plan – the provincial government will “need to support electricity rate mitigation efforts which would further impact the fiscal outcomes of the province.”

But Get This…

There’s a flip side to Moody’s rating that defies the tale of woe told by Dwight Ball in his letter to the Prime Minister on 20 March 20 (see below) and repeated whole by CBC on Wednesday.

Moody’s maintained the government’s A1 rating because the provincial government has ongoing “credit strengths”.  

“Newfoundland and Labrador has unfettered access to a wide range of revenue measures as well as the ability to alter spending plans,” according to Moody’s.  As well, the provincial “treasury management is also a credit strength. With regular inflow of tax receipts, with levels often determined by a lagged calculation, the impact of the current crisis on cash flow will be delayed, allowing the province the opportunity to put in place mitigating measures before the impact is fully felt on treasury operations.”

Moody’s also considered the low interest rate environment would help the provincial government take on more debt successfully.  Plus, the rating includes “an assumption of a high level of extraordinary support from the Government of Canada”.

Decidedly not the picture Dwight Ball has been pushing since late last week.

The Panicked Letter to Ottawa

That doesn’t mean the provincial government will have an easy time of things. 

Until earlier this week, the provincial government hadn’t been able to raise the last $200 million needed to finish its borrowing for long-term debt for the 2019 fiscal year (ended 31 Mar 20).

The government needed $1.425 billion but had stalled out at $1.2 billion in the middle of November 2019, according to Laurentian Bank Securities weekly report on provincial financing programs posted on Twitter each Friday. The provincial government puts the figures at $1.2 billion and $1.0 as late as 29 Mar 20. (See note at end)

So, the government’s problems raising money in the markets didn’t start with the onset of COVID-19, as CBC reported.  They started before Christmas.

As late as last Friday - see chart at right -  there was still $200 million in borrowing left to do in the fiscal year that ended on Tuesday, 31 March 2020. 

Tom Osborne confirmed to NTV’s Michael Connors on Wednesday that  the provincial government finished off its 2019 borrowing in a series of placements.  It got the support of the Bank of Canada on three short-term placements.  

Another offering for long-term debt didn’t need the Bank’s support.

But here’s the thing:  Tom needed to find $200 million in long-term debt. 

As SRBP reported last week, the Bank of Canada intervened to support provincial short-term debt. It will buy 40% of any provincial treasury bills or promissory notes with a term less than 12 months. 

So, if, as Osborne says, the Bank of Canada helped out with some of that, it means the province went to the short-term markets for what it couldn’t place in the long-term debt markets.  That may have turned up cash, but it means the government will have to go back to the market again in less than 12 months and either pay off some of that or borrow more and roll it over.  That’s just a temporary patch.

And by the looks of things, Dwight Ball’s poorly written, panicked letter to the federal government confirms chatter a couple of weeks ago that the provincial government had run into problems in the short-term markets as well.  After a long recitation of general information, Ball stated flatly that “our recent attempts to finalize our borrowing program, both short term and long term, have been unsuccessful.” So yeah, without help they wouldn't have met payroll in April.

What's troubling though is that when asked repeatedly last week about financial problems, Ball kept talking about authority to borrow from the House of Assembly. That was meaningless. He wouldn’t tell the truth about his letter to the Prime Minister or the difficulties his administration had run into the week before raising cash. That's meaningful.

Dwighterdammerung

By Friday, though, Ball did start talking about a looming financial crisis that would supposedly turn up after the health emergency had passed.  That contradicts Moody’s estimate of the government’s ability to manage its own finances, by the way.  The government can management finances, of course, just like every other government in Canada has managed to do. 

All of the problems Ball points to in his letter either exaggerate the current and immediate future problems the government faces or – with things like the public debt - ignore entirely that they result from his own unwillingness to take difficult but necessary decisions. This is a point made repeatedly around this parts, most recently on Monday. 

Wednesday morning, an early explanation for the CBC story was that someone in Ottawa had leaked Ball’s letter.  By the end of the day, though, and given Ball’s eager recitation of a lurid but grossly exaggerated tale of imminent financial collapse in Newfoundland and Labrador,  one could not be blamed for thinking that Ball himself had leaked the letter to CBC in a feeble effort to pressure the federal government with a bluff that gets media attention but that falls on deaf bureaucratic and political ears in Ottawa. 

It’s a familiar, clumsy stunt for local premiers.  Danny Williams tried it in early 2004 when he tried to get a federal bailout in the form of a permanent Equalization payment from Ottawa. He failed.  Paul Davis tried it with CETA.  He failed.

And Dwight has been doing it for five years with his incessant demand for Equalization or something like Equalization, in addition to having one of the most prosperous economies in the country.

And guess what?  Dwight is failing, too.

The impact of such a gambit as leaking your own letter might not come out as expected, if that is what Dwight actually did.  The federal government will help with cash flow, as it did last week through the Bank of Canada, but there is no sign it will ever be willing to take on long-term provincial debt the way Ball expects.

In the meantime, the people of Newfoundland and Labrador are panicked even more than they are already.  And in the markets, they may extract a higher price than usual for the money Ball needs. That will just put Ball in a harder financial spot than he is in.

In the end, Dwight Ball would either have to make the decisions he has refused to make so far, or he would walk away from the Premier’s Office having properly bollocksed it all.

Any bets which path Dwight will take?

Because you can be damn sure Dwight won’t get the money from Ottawa he is trying to get.

-srbp-

Update:  (0810 hrs)

Laurentian appears to have confused the total borrowing needed for 2018 with 2019.  Pretty simple mistake, but it doesn't affect the basic elements of the story.

Either way,  the province was unable to raise $200 million in long-term debt as late as 29 Mar 20.  Over the next two days,  it covered its remaining 2019 requirements through a combination of short-term and long-term debt.