Suppose the Ontario government were obliged to obey the same laws that ordinary people are obliged to obey. In this improbable scenario, among other things, the Ontario government would be compelled to pay down its debt or to declare bankruptcy. Let's run the province's $220-billion debt through a bankruptcy options calculator (bankruptcy-Ontario.org) to check out the consequences of this improvident debt. What kind of monthly payments would the government be required to make - and for how many months?
Before filing for bankruptcy, Ontario Premier Dalton McGuinty would want to check out his legal options. He would naturally prefer to avert a sovereign default and to avoid public judicial proceedings - by simply paying down the debt in an orderly way. Like regular indebted folk, he could make monthly payments stretched over a reasonable time. Let's say five years. After all, it would be prudent to pay down the debt before the next recession.
People tend to think that, with stern self-discipline, they can pay down their debts and avoid bankruptcy. With high credit card debt, though, comes high interest rates: often double-digit. For Mr. Guinty, let's assume 18 per cent compounded annually. In this case, Mr. McGuinty could eliminate the province's debt by paying 60 monthly payments of $7.6-billion. Total cost: $456-billion, twice the cost of the debt.
A better out-of-court option for Mr. McGuinty would be simple debt consolidation - turning all of the province's debts into a single obligation owed to a single creditor. At the very least, he would get a lower rate of interest. Let's assume 12 per cent compounded annually. In this case, his monthly payments would fall to $5.8-billion. Total cost: $348-billion.
His antipathy to the courts notwithstanding, Mr. McGuinty would presumably find these options too onerous. By choosing a formal declaration of bankruptcy, and a court-managed default, he could expect a real break on interest. Let's assume zero per cent. In this case, his 60 monthly payments would fall to a mere $3.6-billion per month. Total cost: $216-billion. But the court might go beyond zero interest - might, for example, let Mr. McGuinty settle his debt for 33 cents on the dollar: $73.3-billion. In this case, his 60 payments would fall to $1.2-billion per month.
One option remains: bankruptcy by "consumer proposal." This is an out-of-court process that would require Mr. McGuinty to hire a private sector trustee, who would direct and manage his repayment of debt. (In the first nine months of 2010, 37,462 individuals declared personal bankruptcy in Ontario; another 22,980 elected to file "consumer proposals.") In his case, however, the trustee's fee would itself be enormous: adding more billions of dollars to the province's debt.
Of all these options, bankruptcy would probably make the most sense for Mr. McGuinty. It would, however, require some personal sacrifice. Under Ontario bankruptcy law, he would be entitled to keep for himself: (1) $5,650 of personal possessions (clothing, golf clubs, books); (2) $5,650 in automobiles; (3) $11,300 in furnishings; (4) $11,300 in tools he needs to make his living; and (5) his RRSPs.
By conscious and calculated design, Ontario's deficits will continue through 2017-18 - by which time the province (and the country) could well be entering its next recession. (The average business cycle since the Second World War has run somewhere between five and seven years.) Ontario may or may not reduce its deficits, as it has promised to do, but it almost certainly will not pay down any of its spiralling debt within the lifetimes of most Ontarians. The Canadian Taxpayer Federation has aptly described this debt-and-deficit crisis as "never-ending."
In these circumstances, Ontario would be wise to consider bankruptcy - a strategic position championed for a number of European countries (Greece, Ireland, Portugal) by The Economist magazine. In an editorial, The Economist said: "This newspaper does not advocate the first rich-country sovereign default in half a century lightly. But the logic for taking [bankruptcy]action sooner rather than later is powerful."
The fact of the matter is this: Mr. McGuinty has essentially conceded default - by postponing Ontario's debt repayment to the next generation. He is lucky that we no longer throw people into debtor's prison for this kind of crime.