Imagine this scenario: after lengthy negotiations with a certain local radio personality at the Roadhouse Inn, you mortgage the house to pay $50,000 for his very fine retro hockey sweater collection. Then you show your wife your new investment, starting with the classic 1970 California Golden Seals jersey with the logo where the seal somehow holds a hockey stick.
She responds to your investment strategy by pulling your jersey over your head and delivering a flurry of right hooks before the kids jump in and separate you.
Being careful to keep the kids between you and her, just like on Hockey Night in Canada, you retort that “The Bank approved the loan. They think it’s a great investment!”
As a scenario it’s ridiculous. When banks approve loans they judge your ability to pay them back, not whether your hockey sweater collection is a great investment.
Sadly, however, that didn’t stop Dennis Fentie, our premier and finance minister, from indulging in some similarly dodgy logic last week.
He announced the Yukon government has obtained a credit rating of AA from Standard & Poor’s (S&P).
“This is confirmation that our sound and prudent fiscal management will lead Yukon into a strong tomorrow … Yukon’s financial position is healthy … Yukoners are well positioned for the future,” is how our leader described it. Or at least those are the words put in his mouth by the taxpayer-funded drivelists in YTG strategic communications.
As is so often the case with Fentie, there is a kernel of truth in there somewhere, but buried under a deep layer of official-sounding nonsense.
S&P, a global credit rating agency, did indeed give the Yukon an AA rating, with a “stable” outlook. This puts us in the same category as Barrie, Ontario, though not as strong as that outpost of fiscal rectitude Brantford (they have a “positive” outlook). The Northwest Territories also has a solid rating, although, since their “Aa1” standing is from another rating agency, it is difficult to compare exactly.
But look at S&P’s definition of AA: “The obligor’s capacity to meet its financial commitment on the obligation is very strong.”
The Yukon’s AA status means S&P have high confidence that the Yukon will pay back its debt. And why wouldn’t they, since Ottawa gives almost $1 billion a year to a jurisdiction with just 34,000 people, and the Yukon still has some cash left (for now) from its big surplus a few years ago. S&P knows that it will be easy for the Yukon government to squeeze health or education spending to pay back future creditors.
Note that, contrary to the impression Fentie’s press release tries to convey, S&P does not give its stamp of approval to his government, its white elephant hospitals in Watson Lake and Dawson City, or its apparent plan to spend the Yukon’s rainy day fund as fast as it can (the “accumulated surplus”, in accounting language).
At least the Northwest Territories’ Finance Minister Michael Miltenberger levelled with his citizens when they had to get a credit rating. He openly admitted that his government intended to go into debt to support the economy, saying in his budget speech that “Borrowing means paying interest every year, and eventually finding money to repay the debt. This puts the burden on future taxpayers.”
Furthermore, much of S&P’s actual report on the Yukon seems completely at odds with Fentie’s feel-good press release.
“The rating reflects our assessment of significant revenue support from the Canadian federal system,” noted S&P. Their analysts observed “a notable deterioration in … operating results in fiscal 2010.”
As for Fentie’s recent claims about his government’s role in fostering private sector development, S&P reports “Public administration, health care and social programs, and educational services are the foundations of the territory’s economy.” They concluded that “a lack of depth and scale limits the territory’s economy.”
And to make Fentie’s press release even sillier, it seems like he is the only finance minister in the world taking the rating agencies seriously. Their credibility is in tatters after giving AAA ratings to mortgage-backed securities that are now worth, well, less than a Golden Seals’ jersey. These toxic investments are at the heart of the financial crisis and have blown holes in balance sheets from New York to Dusseldorf. Fentie should know better, especially since S&P’s rival DBRS gave AAA ratings to the asset-backed commercial paper investments named Symphony and Opus, which are part of the Yukon’s own frozen $36-million debacle.
Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s