The downgrade
One of the world’s major credit rating agencies downgraded Ontario this week, but you wouldn’t know it from the response of the province’s finance minister.
Obviously, politics are politics, and spin is spin. But there’s being on the same page, and then there’s being on the same book.
As The Globe and Mail’s Jane Taber reports, Standard & Poor’s Ratings Services took Ontario down to A+ from AA- and warned that the province is a “sustained and projected underperformer on its budgetary performance and debt burden versus domestic and international peers.”
Ontario Finance Minister Charles Sousa called it a “new rating outlook,” skipping the part about how it’s not only new, but also lower. Then he cited all the really nice things S&P had to say.
So in that spirit, here’s a made-up conversation between Mr. Sousa and S&P’s analysts. Their actual comments are in quotations, but the rest comes from my imagination.
S&P: You’ve got some issues, Charles. “In the next two years ... we expect capital funding needs to cause Ontario's tax-supported debt to peak at 267 per cent of consolidated operating revenues (and its interest payments to remain near 9 per cent of adjusted operating revenues from fiscal years 2015-2017), which we consider very high. While some domestic and international peers display very weak budgetary performances or very high debt burdens similarly, it is the combination of both that sets Ontario apart from the group.”
Sousa: It’s so nice to hear you say that “S&P expects ‘the province to remain on track toward fulfilling its policy objective of eliminating its operating deficit by fiscal 2018.’ Indeed, we are on track to balance the budget by 2017-18 and will do so in a way that is fair, and responsible.”
S&P: Ah, but “like other provinces, Ontario continues to see slow economic growth, which is limiting the natural rate of increase in its key revenue sources, such as personal and corporate taxes. Although the province has had some success in bending its cost curve over the past several years, especially in health care, it still has a large projected after-capital deficit in fiscal 2016 at 10.4 per cent of total adjusted revenues.”
Sousa: I’m so glad you pointed out that “S&P notes that its rating is supported by its view of ‘Ontario’s very strong economy which despite recent slow growth remains well-diversified and wealthy.’ In fact, every major Canadian bank projects Ontario’s economy to grow at a faster pace than the national economy.”
S&P: Yes, it’s a strong economy. But your province will “still have to contend with sizable yearly after-capital deficits, given its large net capital spending intentions. Under our base-case scenario, we foresee Ontario's after-capital deficit remaining above 7 per cent of total adjusted revenues over the next two years.”
Sousa: “Ontario is investing over $130-billion over 10 years in its infrastructure program to build roads, bridges, transit, water infrastructure, schools and hospitals, which will support the creation of over 110,000 jobs per year and grow the economy. Experts such as David Dodge and organizations such as the International Monetary Fund have noted that today’s low interest rate environment and historic under-investments make today an ideal time to invest in infrastructure.”
S&P: “Ontario benefits from what we consider strong financial management. The governing Liberal Party enjoys a majority in the legislative assembly, giving it a strong consensus to pass budgets and effectively implement public policies, such as the cap-and-trade scheme. In our view, Ontario has been slow to fully roll out the spending controls and revenue measures needed to eliminate its structural operating deficit, which has caused its tax-supported debt level to approximately double since fiscal 2008.”
Sousa: I know, right? “Part of the basis for S&P’s stable rating is that Ontario has a stable, majority government and is able to implement policies.”
Ah, you can’t fool me. Or the bank analysts.
“While resolution of the outlook could have been timelier, evidence of a structural deficit and Ontario’s relatively high (and still rising) debt burden helps justify the downgrade,” said Warren Lovely, National Bank’s chief of public sector research and strategy.
“Moreover, we’d note that in its previous rating report, S&P had indicated that maintaining an ‘AA-’ rating would have required the province to both achieve fiscal balance before 2017-18 and place its tax-supported debt burden on a downward track. With neither test having been met, the agency proceeded with the downgrade.”
Fitch Ratings, by the way, affirmed Ontario at AA- and its outlook as stable, citing its plans to slash the deficit and its “strong financial management.” It too, though, warned of its “large and growing debt burden.”
A scene I'd love to see
Game of Loans: Explaining Ontario debt to the Liberals
China's market tumbles
The Chinese government is taking further steps in an attempt to halt the market rout.
As our bureau chief Nathan VanderKlippe reports from Beijing, the government allowed more than 1,300 companies to temporarily pull out of the market, and regulators slapped restrictions on shareholders, as well.
The Shanghai composite, continuing its exceptionally volatile ways, tumbled 5.9 per cent. Hong Kong's Hang Seng lost 5.8 per cent.
The central bank is also taking steps.
“Chinese regulators have upped the ante again, but seemingly to no avail as stocks in China continue to fall,” said analyst Jasper Lawler of CMC Markets.
“The People’s Bank of China is now providing ‘access to liquidity’ for the China Securities Finance Corp. (CSF) to prevent ‘financial risk,’” he added.
“Translated, the PBOC is giving the CSF money to buy up stocks. This is in addition to the credit that the CSF has made available to brokerages to buy shares.”
Twitter status of the day
“China has lost 15 Greeces in market cap in three weeks.”
From @zerohedge
Microsoft cuts deep
Microsoft Corp. is slashing up to 7,800 jobs and taking a huge charge on its phone business.
The tech giant unveiled plans today to take a fourth-quarter impairment hit of about $7.6-billion (U.S.) from its acquisition of Nokia’s handset business.
There will also be a restructuring charge of about $750-million to $850-million.
The jobs will be lost largely in the phone business.
“We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem including our first-party device family,” chief executive officer Satya Nadella said in a statement.
This time we mean it
Greek Prime Minister Alexis Tsipras stressed today that he doesn’t want a fight with his European partners as yet another deadline approaches in the bitter negotiations.
“We are determined not have a clash with Europe but to tackle head on the establishment in our own country and to change the mindset which will take us and the euro zone down,” he reportedly told EU officials.
Greece was to apply for further bailout money and outline a reform program. Then, yet another weekend summit of EU leaders would be held to pass judgment on the proposals.
“We trust member states appreciate the urgency of our loan request at this time given the fragility of our banking system, our shortage of available liquidity, our upcoming obligations, our buildup of internal arrears, and our expressed desire to clear our outstanding arrears with the IMF and the Bank of Greece,” the finance minister said in a letter today as Athens applied for fresh funds.
As for that deadline, they say they really really really mean it this time.
“The euro summit gave two clear deadlines to Greece: Friday morning for a detailed proposal, and more importantly Sunday, to decide whether Greece leaves the euro area,” Société Générale said in a report today.
“We cannot rule out a deal on Sunday but strong conditionality and commitment to reforms will be required,” it added.
“Bridge loans aimed at financing Greece over the next few months may be part of the deal but if and only if a medium-term solution is found.”
How the euro zone seems to treat deadlines ...
Quote of the day
“This is faster than America, faster than Germany and twice as fast as France.”
U.K. finance minister George Osborne as he outlined projected 2015 economy growth.
Britain trims growth forecast
The U.K. government trimmed its economic growth forecast oh-so-slightly as it pledged to continue cutting its deficit, though later than expected, in its budget today.
The Office for Budget Responsibility now projects growth of 2.4 per cent for 2015 and 2.3 per cent for next year. Only this year’s forecast is changed, down marginally from an earlier projection of 2.4 per cent.
Chancellor of the Exchequer George Osborne also pushed back the timeline for balancing the budget, by one year to 2019-2020.
“Having come this far, there can be no turning back,” he said in the House.
Barclays CEO gone
Barclays Bank PLC overhauled its management team today, with Antony Jenkins leaving as chief executive officer.
The bank will hunt for a new CEO.
“Notwithstanding Antony’s significant achievements, it became clear to all of us that a new set of skills were required for the period ahead,” said deputy chairman Sir Michael Rake.
The change appeared to be a hit among shareholders.
“Given the 3-per-cent rise in Barclays shares so far this morning, investors seem to be relishing a change in direction at one of the U.K.’s largest banks; Mr. Jenkins certainly put his all into reforming the bank, but even he was unable to effect the change needed, particularly in the arena of cost-cutting,” said senior market analyst Chris Beauchamp of IG in London.
“The board has decided that the way ahead lies in an aggressive slimming down of the investment bank, with any new boss being expected to wield the knife quickly and without mercy.”