Ball’s $2.7-B borrowing problem

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James McLeod
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Premier says government can’t get long-term borrowing in the amounts it needs

The provincial government has racked up nearly $2 billion in short-term treasury bill debt in less than a year.

Telegram file photo
Premier Dwight Ball

And in an interview with The Telegram, Premier Dwight Ball said the province could not get the kind of money it needs from long-term lenders if it tried.

Ball was elaborating on earlier comments he made regarding long-term borrowing, and the precarious financial position of the province.

“We have no indication, where we are today, that there is any domestic market right now that would actually fund 100 per cent of our borrowing needs,” Ball said.

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

This year, the government is running a $2-billion deficit, in addition to a record deficit last year, and more red ink is forecast for the next five years.

Faced with all of that, Ball said it’s been tough to get anybody to lend the government money long term, and most of the province’s spending has been fuelled by short-term 60- and 90-day treasury bills.

Since the November provincial election, the government has taken out one loan for $235 million for three years at an interest rate of 1.1 per cent, and another 31-year loan for $300 million at an interest rate of 3.3 per cent.

But that combined $535 million is small compared to more than $2-billion worth of borrowing Ball said he expects the government will need to do during the next couple of years.

And, he said, before lenders give the government any money long term, they want to see the Liberals’ budget.

“The question will always be, ‘What are you going to do about your current situation?’” he said.

“The reaction will be much more positive if we have a plan that we can show them.”

At the beginning of the fiscal year in April 2015, the provincial government had about $780 million in debt in short-term treasury bills — typically 60- and 90-day loans.

By Oct. 1, the short-term treasury bill debt was up to $1.1 billion. By Dec. 1, the day after the Liberals won the provincial election, the short-term debt was $1.9 billion.

Today, the short-term treasury bill debt is $2.7 billion.

Ball said the short-term loans don’t actually cost the government more than long-term borrowing.

In fact, the average annualized interest rate for the short-term treasury bills is 0.643 per cent, lower than the interest rates being charged for those big long-term loans.

Ball said the issue with the short-term money is that it’s risky.

“My issue is not really just the cost of short-term borrowing versus long-term borrowing. Its the exposure that you get if you do not put in place the long-term borrowing strategy,” he said. “In a particular short time frame, you can get cheap money, but with that cheap money comes exposure to rating changes.”

Ball said the key is developing relationships with lenders, which is something the previous government never did. For years, because of high oil prices and huge royalty revenues, the previous government didn’t need to do any borrowing.

“The investor relations strategy is key to all of this, and, as I said, we had not been in the market seven years prior to this, so in a lot of ways, there are introductions that will have to be done,” he said.

“They are looking for this budget, there’s no doubt about it. They are looking for a credible plan, with targets, and then the determination on what level of lending they will engage with this province.”

 

 

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  • Terry
    February 25, 2016 - 22:15

    It's all about Muskrat Falls and Bill 29 to try and cover it up! And now we're bankrupt, can't turn left, can't turn right, can't backup. Put the broad "R" on the door. Mr. Auctioneer . . . do I hear a 5, and do I hear a 10? . . . Muskrat Falls sold to Québec Hydro for 10 cents on the dollar. And there is no way out because Danny stuck around just long enough to see Muskrat Falls far enough down the road just pass the point of no return. Something like if you sent a Cormorant helicopter 800 km offshore to do a mission, with no refuelling option, but the fuel range of the helicopter is only 1,389 km. Danny then threw the reins over to Kathy Dunderdale to get the Federal loan guarantee from Harper. He sort of had Frank Coleman lineup as a bonus – but by then things were starting to fall apart. I don’t envy the spot that Dwight Ball and Cathy Bennett are in – between the devil and the deep blue sea. Québec Hydro will probably have the last laugh.

  • coaster
    February 25, 2016 - 20:31

    roy206, I think people aren't commenting because most have been listening to a constant bombardment of Crisis, HST, gas tax hikes and lay offs, kinda like that song that gets stuck in your head and you cant stop humming. I have read some common sense ideas, straight forward ideas, no brainer ideas, yet there is nothing from government, is that because Dwight is only listening to Brian Tobin?. But I'm sure our government won't let happen what happened in Greece! Just to be on the safe side I won't hold my breath

  • kd
    February 25, 2016 - 14:52

    I think premier Ball is trying to convince nlers he has no choice only to break his election promises in my opinion thats dishonesty goes to show all politicans are cut from the same cloth with regards to tax increases if thats the route he decides to take he will spend one term in office

  • roy206
    February 25, 2016 - 13:24

    This is discouraging and maybe the root of the financial problem....This article gathered 5 comments...the future of the province is at stake and we are borrowing $9 Million a day to stay afloat.... Dennis OK trip to Florida has gathered over 40 Comments to date... The financial situation cannot go on indefinitely ...we are in the same position as Greece now..and no one cares..

  • joe
    February 25, 2016 - 11:38

    stop committing money to all day kindergarten and Corner Brook hospital and get ferry costs under control,,,time to act

  • Charles Murphy
    February 25, 2016 - 11:12

    There a better way to approach these problems without too much hardship to the people.you're leaving out one very important part of the equation that would see better results in the end.just think..

  • Errol
    February 25, 2016 - 10:15

    The chickens have come home to roost. With the heady days of high oil prices gone for much longer (maybe forever) than was initially thought, we now have to face our realities here in NL...no choice in the matter. Mr. Ball is absolutely correct in his approach. The rating agencies and lending markets were largely ignored by the NL PC's in the few short years of high oil prices, at a time when 34% of all Provincial Revenues came from oil royalties, a bounty never before seen. The Williamas/Dunderdale incompetents did not pay attention to the fact that the so called 'boom' was not real...just a mirage in the desert. The spending was unabated by caution, with most resources of the newly created Nalcor focused on justifying a completely ill advised political imperative called Muskrat Falls, to the exclusion of all else, including normal upgrading and maintenance of existing Hydro assets. Remember the Mad Hatter's tea party in 2012 to sanction Muskrat, when they all danced around the Xmas tree in the Confed. Bldg., like the fools they were? Ms. Dunderdale did not understand the fundamentals of a booming economy like we had. There will come a bust! In addition, all through those years, NL had the highest unemployment rate of any Province, our traditional position. This, in spite of the thousands of commuters to the Alberta construction sites, Voisey's Bay site construction, the Hydramet plant construction, Bull Arm and Marystown oil construction projects, and yes, even the Muskrat construction site. Of course, the common word in all this is 'construction'. In their blind spending euphoria, the.incompetent Provincial government gave not a whit about the fact that these jobs were all 'temporary', and they would all end, with nothing on the Horizon. We have this stupid outlook in this Province that the fishery is gone, and we need to fund a huge U so that all and sundry can attend at and get educated for jobs...elsewhere. The world's huge, growing population will always have need for ocean protein. We took our eye completely off that ball. Alberta has a huge economy, outside the oil patch, including their base...agriculture. They will hurt, but will be fine. NL, on the other hand, had Governments who thought that the economy which grew so rapidly in St. John's would last forever. Their navel gazing precluded understanding what was happening. It pervades the place like an offensive odour. Yes, we see Doc O'Keefe running off on his annual Florida jaunt, at a critical time, while giving everyone the full five finger salute. I'm the Mayor...and you're all paying me well! He of course, ignores all the optics, all the time. What fools we are to stand for this behaviour. St. John's is a dump Doc, do you never look around on your jaunts! To Mr. Ball, I say stay the course, and get our finances in order. It is a tough challenge after the ravages of the past 12 years and a paradigm shift is needed in the way we manage Government. We have to find a cure for our hangover, and learn to avoid incurring another one!

  • Dithering - part 11
    February 25, 2016 - 09:17

    Remarkable. The premier has now admitted that the province's finances are is such bad shape that the banks - not his government - hold the whip hand. And yet he just continues to dither while our future slips away.

  • Stephen
    February 25, 2016 - 08:06

    This is a bit rich. Everyone complains that the Liberals haven't been fast enough to come up with a plan, and here Ball is complaining it's difficult to get borrowing because they haven't come out with a plan yet. So do something! Have a press conference TODAY that you're going to raise the HST. We've already lost millions in revenue because of their poor decision to cancel the increase.

  • Aaron
    February 25, 2016 - 08:02

    Er, um, you can't pay your bond date earlier than the maturity date without financial penalties.... So if you lock in for 30 years, you have that debt on your books for 30 years and that's also very risky because it scars your balance sheet for decades. When the PCs were in they could only pay their bond debts when they became due (bonds that were very long term from all previous governments), so when people say they should have paid down more of the debt when they had the cash, don't understand that they couldn't without costing us more money (except towards the pension liability which fluctuates wildly from year to year). Very disappointing that the Premier first of all said the previous government knew it couldn't borrow long term when they could, and second of all he came out publicly and said long term borrowing costs less that short term, so he didn't even know or understand. This is troubling since they've already cost the province millions of lost HST revenue this year by cancelling the increase and that they don't really understand a "legacy fund" would also have been poor financial management during the past decade when you break it down and use context. So far not a lot of confidence in their knowledge/competence. Not a good start.

    • Errol
      February 25, 2016 - 13:04

      Your points are fine, but no disrespect intended, mostly red herrings. When the PCs came to power, net public debt was about $11 billion if memory serves. Today we are about $14 billion...without the Muskrat Falls debt...which is about $5 billion spent/committed already. Make no mistake -this is not 'Nalcor' investment. Every dollar was transferred from NL Gov't General revenues, or used by Nalcor instead of providing the Hydro 'dividend' to Government, and is part of our Public debt. The Muskrat Falls project on it's own could not raise a penny of financing in the markets. Our total public debt is projected to be some $22 billion by 2020. Fundamentally, every penny of the oil royalties have been spent...as well as all the other Government revenue streams, plus the borrowing. Not a good start? There is no good start from this mess. Spending caused the problem today...not just oil prices.

    • Aaron
      February 25, 2016 - 16:16

      Hi Errol, thanks for the feedback but I have some counter arguments on the points you raised. 1) You referred to the net debt rising. As you seem to know net debt has many different components to it's calculation (pension liability being one of them). Over $5 billion dollars was paid on our debt while the PCs were in power and there has been little to no new borrowing for operational purposes until just recently. That should be recognized. However pension liability has increased over that time, resulting in net debt going up. So you need more breakdown and context when looking at net debt on it's own (a decrease in your asset values also increases net debt). Clearly paying down debt and spending cash for infrastructure needs is prudent financial management. The gov even struck a deal with the unions to somewhat address the structural pension liability problems that will be reflected going forward in net debt 2) MF is a revenue generating asset. The revenues will be used to service and pay the debt (yes, which we pay for, however we pay power bills now, and your bills now don't even go to nalcor (a company you and I own), they go to buying barrels of oil from other jurisdictions). Also, as an asset, government could sell the dam and it's revenues down the road, and the value would be the discounted cash flows, not the cost of the building the damn, so we could recoup a large portion of the cost or even potentially more than the cost. Also, you ignore that if MF was not being built, something else needs to be built to meet the energy demands. If we're not paying billions on MF, we're paying billions on Holyrood and purchasing oil to burn into the atmosphere and contribute to climate change. 3) You reference debt is projected to be $22B by 2020. That's if nothing is done. Who is going to do nothing? As you know, governments cut/raise spending and taxes every year. So a tax increase and a spending cut this budget and next could eliminate the whole deficit. This is an important concept to understand. A $2B deficit this year doesn't mean there has to be a $2B deficit next year or in 5 years. And it certainly doesn't condemn the past 10 years of financial management. 4) You say every penny has been spent from the oil revenues. Of course! And rightfully so! As taxpayers we don't expect anyone to pocket the money or have it sit in a bank account doing nothing when we have bond debt at older high interest rates to pay, roads to pave, schools to build, taxes to reduce etc. Ideally each budget would have a $0 balance. Those taxpayer revenues need to used, but wisely, and I think paying down debt and infrastructure upgrades is appropriate. There has been some money spent on things that should have/could have been spend in better ways on other things and should be rightfully criticized. 5) You said spending caused the problem, not just the oil prices. I somewhat agree with you. Spending should have gone up when revenues went up in the past 10 years, but not at the cost of a large deficit. Now that the revenues have dropped, spending needs to go back down. Smaller deficits from time to time are ok - just look at the global financial crises and the stimulus packages that were introduced in the past, but I don't think there was any need for a deficit the last few years, and spending was too high by a few hundred million dollars in my opinion. But definitely not by $2 Billion. The crash in oil prices is the main culprit, and there is a fix for that - Spend less next year and raise some tax. In an economy tied so closely to oil, you will see massive surpluses and massive deficits in a current year. Remember we had a $2B surplus not that long ago. Oil prices are impossible to predict, and if someone says there's no way oil will be "X" price, beware of that person because they have no idea but act like they know. And I don't subscribe to the theory that you should spend based on say $50 a barrel when the price is $100 a barrel and you end up with a large surplus. In this case you're denying taxpayers the money they know is there and want ear marked for certain needs. You need to try and "guess" as close as possible and be a tiny bit on the conservative side. You 100% need to try and be proactive but the reality is certain years being "reactive" is inevitable. If you really think about it, how could this have been avoided. The Liberals have never said the Tories should not spend money on something, in fact they were always telling them to spend more. Remember the cuts made a few years ago and the Liberals and NDP blasting them for it? Also, if there was a "heritage fund", how much would it have been? Wouldn't we still need to raise taxes/cut spending for next year anyway? Wouldn't a legacy fund mean we didn't spend the money on other things the last 10 years? Would the money in the fund earn a return greater than the cost of bond debt/pension expense, or would we have lost the money in the stock market? 6) You said there's no good start to this mess. Actually there is - If they didn't repeal the HST increase we would have had millions of revenue coming in the last two months. If they came out with a plan to tackle the deficit right away the bond markets would be more willing to loan money at better interest rates. So far the inaction has had a real financial cots to the province and that is solely and squarely on the new government that must be accountable and start to actually govern.

  • Maurice E. Adams
    February 25, 2016 - 07:32

    What an unbelievable mess. Put the Muskrat dam/generation facility on hold (half of whatever money we have committed is for the transmission line anyway, so let that continue, we can use Upper Churchill recall/and/or PPA from Quebec Hydro and test reliability of line to the island). ..........Per KWh energy generation at Holyrood for 2015 cost 11 cents and we only need to generate about 1.1 billion Kwh a year (the approx average bneeded over the last 10 years). ...........With Muskrat, per KWh cost is closer to 30 cents (3 times more) and ratepayers have to pay for 4.5 billion KWh (4 times more). What will taking that kind purchasing power out of the pockets of ratepayers do to the economy?

  • roy206
    February 25, 2016 - 06:22

    Thanks...I always " Assumed " the province was broke, ....now we all " Know" that the province is broke... But to be fair, the previous administration, 50% retired schoolteachers and 20% gov retirees, will ultimately be the ones who actually Bankrupted the province. The province will never recover from the financial abuse of the previous admin., not in the next 500 years....

  • Randy
    February 24, 2016 - 20:13

    We know the PCs are not good at math but somebody should explain this to Paul Davis and Steve Kent. They clearly don't understand the extent of the mess they made

  • Redgrave Stephen D
    February 24, 2016 - 20:10

    I warned you all about the treasury bonds two years ago. Nobody listened to me--now I must say. I informed you thusly. Do you remember Daniel M? perhaps if the public knew this never could have taken place.

  • Denise
    February 24, 2016 - 19:56

    What's the hold up? Show them your plan... Oh right! You don't have one.... Hurry up and do something! You have spent the last almost 3 months in leadership and have done nothing to tackle the debit.

  • Graham
    February 24, 2016 - 19:53

    I hope Constable Davis and the Wiseman are proud of the mess they left the province in.