Like a street preacher, Walter Schroeder, the retired founder of what is now the world’s fourth-largest bond-rating agency, is compelled to warn of a coming apocalypse. You needn’t worry unless you are attached to Newfoundland and Labrador. The terrible circumstances that Schroeder foresees call for that province’s imminent bankruptcy.
“Newfoundland and Labrador needs Ottawa’s help, and very soon, or it will be subjected to insolvency when the level of its fiscal problems becomes known,” Schroeder wrote in the Globe and Mail on Nov. 26. “The easiest call I’d ever have to make as a debt rater would be a Newfoundland bankruptcy. It’s a sure thing,” he told Financial Post Magazine around the same time.
The COVID-19 pandemic, the collapse of oil prices and a near certain global recession have only made him more adamant. “Without intervention from the federal government, the province will go broke,” he wrote in the Financial Post on March 12. “The fall will be precipitated when the rating agencies soon start cutting N&L’s credit rating.”
Neither the firm Schroeder created nor the government of the province he professes to love find these declarations helpful.
DBRS Morningstar, the present-day incarnation of the company Schroeder started in 1976 and sold in 2014, currently rates Newfoundland and Labradors debt as A (low). That’s the lowest grade of any Canadian sub-sovereign, but still a decent one. “We’re two owners gone from Walter,” company spokesman Scott Anderson said. Travis Shaw, senior vice-president of public finance, added: “Obviously, Newfoundland and Labrador officials are going to be going back to the drawing board. That’s something we are going to wait to see. Where are oil prices going to level out and how is the province going to respond to that?”
Tom Osborne, the province’s finance minster, at least agrees with Schroeder that his province should be getting more money from the federal government. His boss, Premier Dwight Ball, will be pushing for an overhaul of both the Fiscal Stabilization Program and the equalization program. “We are arguably the province that absolutely needs equalization the most, but we are the province that does not receive equalization funding,” Osborne said. “The Constitutional obligation for equalization is not being met here.”
Still, Osborne could do without a prominent former bond rater running around telling everyone that Canada’s easternmost province is a basket case. The spread between the yield on Newfoundland and Labrador bonds and those of Ontario has apparently been all over the place this week, and was roughly 10 basis points higher than it was before oil prices collapsed on March 9.
We will welcome help from anybody at any time, but the accurate story is seen by our bond-rating agencies
Tom Osborne, finance minister, Newfoundland and Labrador
Alberta and Saskatchewan are in the same boat, but they probably have enough idle wealth that they could raise taxes if they ever faced a credit squeeze. Newfoundland and Labrador has much less room to manoeuvre. The province relies on offshore oil royalties for about 15 per cent of its revenue, and the Brent price, which it uses as a benchmark, is trading around US$33 — compared with roughly US$65 a year ago.
Osborne said he’s decided to postpone the budget until things settle down. The situation is “concerning,” but that doesn’t mean the province is about to fall over the edge.
“I’m not certain that all of (Schroeder’s) comments are helpful,” the minister said. “We will welcome help from anybody at any time, but the accurate story is seen by our bond-rating agencies,” which, like DBRS, have access to privileged information and say the province’s debt is comfortably investment grade.
Who to believe, the man on the crusade or those who have an obvious incentive to dismiss him?
It doesn’t matter, really, because Newfoundland and Labrador obviously needs a lifeline, as do Alberta and Saskatchewan, the two other provinces being walloped by the second oil-price shock in five years. The sooner the federal government makes clear that a backstop is in place, the sooner those credit spreads will narrow. If we’re lucky, the crisis will force changes to transfer programs that politicians have been ignoring for years.
We were able to find our way through (the fishery collapse of 1993). We will find our way through this situation as well
Tom Osborne, finance minister, Newfoundland and Labrador
But we’re still going to need to have an uncomfortable conversation about debt and burden sharing.
Ever since Paul Martin broke the back of the federal budget deficit in the late 1990s, we’ve accepted a polite fiction that the only debt that mattered was the one Ottawa held. Even as many provinces drifted toward trouble, we embraced the Government of Canada’s AAA rating as protection against the debt vultures of lore. “Sovereign default” was something that happened in places such as Argentina. The federal debt-to-GDP ratio was pinned around 30 per cent. We’ll be fine.
The rest of the world, however, tends not to look at Canada that way. The International Monetary Fund and others see that Canada’s general government debt is closer to 90 per cent of GDP. We’re one country, and we’re all ultimately on the hook for it, as far as the country’s creditors are concerned. How we share that burden is up to us.
Newfoundland and Labrador could be a zombie jurisdiction, or it could be wily enough to find a way to keep going through this crisis. Either way, it represents Canada’s weakest link. If the financial crisis a decade ago taught policymakers anything, it’s that vulnerable points in the system need to be quickly reinforced.
Osborne recalled one of the worst moments in Canadian economic history when asked if he had a message for bondholders. “In terms of our investors, we’ve seen, for example, in 1993, the collapse of the ground fishery, which had an absolutely devastating impact on our province,” he said. “We were able to find our way through that. We will find our way through this situation as well.”
I’m sure many Newfoundlanders think their government might as well have defaulted. Surely we can do better than that this time.
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