Feds feeling pressure to put wounded firms on life support
Tens of billions of dollars in bailouts sought as entire industries forced to power down
Ready for the second phase of the battle against a second Great Recession? We weren’t two years ago, when Justin Trudeau’s government bought the Trans Mountain Pipeline from Kinder Morgan Inc. for $4.5 billion.
The newly ascendant constituency of green voters recoiled in horror at the prospect of the federal government becoming a fiduciary in the transport of fossil fuels. And many of those who would benefit most had an allergic reaction to Trudeau’s rescue operation, as proud Alberta free marketeers were disgusted by the nationalization of a private venture.
Both anecdotal evidence and ballot-box results suggest the Trans Mountain rescue caused the Liberals all sorts of problems in last year’s election. Now, the coronavirus crisis is about to make Trudeau’s portfolio of troubled assets much bigger.
“We need a massive injection of liquidity into the economic system,” John Ruffolo, vicechair of the Council of Canadian Innovators, pleaded last week on a conference call with Mary Ng, the federal trade minister.
The bailout of Trans Mountain was arguably justified because of a market failure: the venture had passed the original developer’s tolerance for delay, so the government stepped in to prevent a ripple effect from causing wider pain.
Multiple that by 10 today. Or 50. Whatever the number, the federal government, particularly Finance Minister Bill Morneau, is under pressure to deploy tens of billions of dollars to put companies — even entire industries — on life support while governments effectively power down non-essential elements of the global economy to stop the spread of COVID-19.
Forecasters have shifted from gingerly predicting a downturn at the start of the month to conceding that we are experiencing a recession of historic proportions. Kristalina Georgieva, managing director of the International Monetary Fund, on March 23 said the economic damage will be “at least at bad” as the fallout from the financial crisis in 2008.
Yet the Trudeau government so far is holding back. Craig Wright, chief economist at Royal Bank of Canada, estimates the federal budget deficit will have to swell to 10 per cent of gross domestic product, from about one per cent in the previous fiscal year, to match the COVID -19 responses of a representative set of peer countries that includes Australia and Germany.
Phase one of Morneau’s rescue effort, released last week, is “really just helping at the edges,” said Ruffolo, who was pushing a scheme that would see the federal government back quick, sizable, no-or-low-interest loans for essentially any Canadian company that needed one.
“We’re getting the sense that this is the only thing that is going to stave off a whole lot of bankruptcies,” he said.
That isn’t as alarmist or self-serving as it might sound. One of the reasons Canada struggled to regain its stride after the Great Recession was that there weren’t enough exporters left to take advantage of the recovery in global demand. There are solid reasons to keep as many companies alive as possible, especially if the more optimistic outlooks are correct and the recession is brutal, but short.
Politics will inevitably colour — and complicate — the response.
Stephen Harper, the previous prime minister, used the budget in November 2008 to try to jam the opposition parties by cutting their federal subsidies. The gambit triggered a Constitutional crisis and delayed fiscal stimulus by several months. This week, Trudeau appeared ready to risk a similar political standoff by using crisis legislation to give his ministers the authority to spend without Parliament’s consent through 2021.
There are also the calculations over what various voters will accept.
That will be especially tricky for Trudeau. The Liberals recommitted to getting serious about climate change in the October election, and yet the industries that are most desperate — oil and air transportation — rank among the heaviest emitters. The Globe and Mail last week reported that Alberta Premier Jason Kenney was pushing for a government-backed rescue fund to buy equity stakes in oil-and-gas companies, an echo of the 2009 bailouts of General Motors Co. and the company that became Fiat Chrysler Automobiles NV.
Kenney’s apparent desire for a rescue like the one Ontario got a decade ago is “the only viable approach for him,” said Paul Boothe, who helped oversee Canada’s role in the automobile rescue in 2009 as senior associate deputy minister at the Industry Department. “Whether it’s the right thing for all of Canada, I’m not sure,” added Boothe, now an academic at Western University’s Ivey Business School in London, Ont. “I would be open to temporary, low- or interest-free loans to energy companies. And then because they are loans, they have to make their own judgments about their longer-term prospects.”
Morneau’s rescue efforts are trailing those of his peers by at least a week, but Boothe said he thinks officials still have a little time. The most important stimulus programs — “automatic stabilizers,” such as jobless insurance — were already in place and will now be working.
Yet there’s only so much time on a battlefield.
Harper let Nortel Networks Corp. fail in 2009 because the company’s management, unlike the leaders of GM and Fiat Chrysler, couldn’t convince the government that it would get the public’s money back, Boothe said. In retrospect, Canada might have been better off with Nortel. Huawei Technologies Co. Ltd. acquired much of company’s talent and technology, and is now the world’s dominant provider of the next-generation wireless gear that makes up the nervous system of the digital economy. GM and Fiat Chrysler remain going concerns, but shrunken ones.
The question, Boothe said, is “does the firm that is going bankrupt have a plan that makes you feel confident that you are going to recover that money?” They are going to be asking that question a lot in Ottawa in the days and weeks ahead.