Fiscal Fear Mongering in Quebec or Separatist Number’s Lunacy?

Independent Quebec’s greatest economist or numbers’ charlatan

Earlier this month Ed Devlin the head of Canadian portfolio management at Pacific Investment Management Company warned Quebec politicians to be careful in the upcoming elections. Devlin an expert in fixed income market and liability-driven investing wrote a research note¹ on Quebec’s debt dynamics and the possibility that talk of sovereignty had the potential to derail the province’s current virtuous debt dynamics as has been the case in parts of Europe in the last few years, most notably Italy.

The research note sparked indignation in French language media and in separatist circles. PQ economic critic Nicholas Marceau was ‘shocked’ by the scare tactics employed by Devlin and Martin Aussant head of the party Option National, an ex-economist himself, stated that the head of PIMCO Canada’s analysis wasn’t credible. Even the federalist Parti Liberal du Quebec felt the need to chip in, with finance Minister Raymond Bachand saying that Quebec and Italy were not comparable as they were not in the same ballpark.

It would seem that the lively reactions from the political sphere have proved Devlin right, Quebec politicians just don’t get it. The Liberals and the Option National seem to agree, Italy and Quebec cannot be compared. Martin Aussant actually went on record saying that Quebec was in the average of OECD debt to gross domestic product (GDP) percentages. The question now is whether Aussant wants to plead guilty to ignorance or deceit has he is wrong about Quebec’s relative average debt load.

If one were to take Quebec’s provincial ‘net debt’, which measures the provincial government’s debts minus the province’s assets, Aussant would be right, Quebec is just slightly below average in terms of debt to the size of the economy with a debt of 47% in 2010 versus 56% on average in the OECD. The conversation might have stopped there if Aussant had done his economic homework, but having been in politics for much too long it would seem that his professional due diligence might have slipped a little. Quebec’s net debt measure doesn’t use the same methodology as the OECD, one would have to add all provincially guaranteed debts to the equation to properly compare with the OECD’s numbers.

Thankfully the provincial Auditor General wrote a 2010 study attempting the exercise of comparison. He came up with another net debt number 53% of GDP. While this number is higher it remains squarely in the OECD average, this was surely the number that separatists like Aussant think about when talking debt dynamics. However it still isn’t the same number the OECD uses. The OECD calculates total debts not net debts. Using that number Quebec jumps straight to the top and comes in just shy of the podium in fifth place of most indebted jurisdictions in the OECD. Not really close to the average as certain like to claim.

But all this fails to take into account that separatist want to separate from Canada, hence the Canadian debt proportion that an independent Quebec would certainly have to assume. Adding today’s Quebec gross debt to its proportional share of the federal debt, an independent central Quebec government would have a whopping debt load of 135%. There you have it folks Quebec would take the bronze medal for national debts if independent, right behind gold winning dysfunctional Japan and bankrupt and bailed out Olympian Greece with silver.

Some might ask how is it that Quebec can be one of the most indebted jurisdictions in the world and not go bankrupt, while even the United States is quietly considering² State bankruptcy legislation for its lesser indebted local jurisdictions. The answer is hotly debated in Europe right now, and was correctly pointed out by Devlin in his research paper. Europe and even the US to a lesser extent are monetary unions without fiscal unions; they share currencies without sharing fiscal resources much to the contrary of the Canadian federation.

Through the equalization formula Quebec receives a fiscal top up (worth over 10% of its provincial budget), effectively buffering it against the reckoning of financial markets. While Europe dithers on the question of bailing out its member States, every year ‘have-not’ provinces get a mini bailout. Without assurances that this money stream is permanent international investors would drop Quebec debt securities so fast Spaniards would thank financial markets for having gone easy on them.

Another rationalization separatist economists like to use to explain why Quebec is much stronger than the rest of the worlds is that when looking at net debts Quebec’s finances are resilient. That could be true if there actually were assurances that those assets that can be sold off to pay debts were worth what Quebec’s balance sheet says they’re worth. Unfortunately, that never seems to be the case. Just before Iceland got into trouble and got bailed out by the IMF it had one of those on paper fortress like balance sheets. It actually had a much lower net debt ration than Quebec does today. Unfortunately when a country gets hit by a deep recession, increasingly likely nowadays, asset values tend to drop and net debt ratios tend to shoot up. Since the Caisse de Depot et Placement du Quebec (a huge chunk of Quebec’s assets) has already proved it’s capable of loosing 40 billion dollars in a single year, what assurances remain that those losses won’t repeat themselves. And If Quebec were to separate who exactly would like to swoop in and buy Quebec’s crown corporations? Greece has been selling its State owned enterprises for pennies on the dollar in its crisis, what assurances are there that Quebec’s assets will sell for much more? Using accounting valuation to describe the worth of a government’s assets is quite the precarious game and it takes a lot of optimism to believe those numbers as credible.

Another favourite retort against Devlin’s research note is that Quebec doesn’t have the fiscal evasion problems that Italy and its ilk have. While this is true, Quebec has a much lower proportion of taxable wealthy citizens than Italy does. Given wealthy anglos historical propensity to leave in times of separatist pressures, the issue in Quebec shouldn’t be whether we have a tax evasion issue come separation but rather will Quebec have a wealth migration issue if that time comes. All in all separatists may continue to find tricky accounting techniques to rationalize separation economically, but at the end of the day numbers and facts can only lie so much. The separatist project remains far from credible economically.

If separatist political parties want to head out the door of Confederation giving up equalization payments and accepting a whopping debt bill on the way out of the restaurant maybe a little more fear mongering is in order. Let’s hope that cooler heads prevail in this election campaign and that market rattling talk of separation can go back to were it’s been hiding for the past two decades: the dust bin.

A Montreal Manifesto

Yesterday I chose to walk home from school. It’s not an entirely short walk, walking from Guy street downtown to Monkland avenue and Girouard street in the Notre-Dame de Grâce neighbourghood will take the common walker an hour to cover the 5 kilometer distance. The walk wasn’t entirely unpleasant from a nationalist economic point of view. Signs of development abounded.

The very beginning of my walk began in the heart of Concordia University’s downtown campus. One is surrounded by the new glimmering Business School building, the slightly aged but just as freshly sophisticated Fine Art’s and Engineering building and the 70’s designed work of horror administrative building, being actively given a contemporary face lift. Walking westwards along Maisonneuve street one eventually reaches just north of the old Seville Theater block. Pausing for a moment I could not help but feel proud of seeing the old decrepit structure vanished, replaced with a massive hole in the ground from which a giant crane was erecting new 10 story condo development. Turning away from the Westmount city hall and walking past the illustrious Selwyn House school for boys I began the St-Antoine street climb. Halfway up the side of Mount Royal, the middle of the island historical mountain overlooking downtown, and peering south down one of Westmount’s steep streets, I caught a glimpse of an army of cranes in the distance.  The next street provided a better view of what is to be one of Montreal’s two Super Hospitals. Half a dozen tall cranes were churning and jostling in the air over the largest construction sight I’d ever laid eyes upon.

Finally reaching my own neighbourghood and the avenue us locals call Monkland Village, looking westwards along Monkland my gaze was met with the sight of not one, not two but three different developments of mixed residential and commercial use. This street which had not seen any change in the last decade, asides from a butchery moving and a store or two closing, was now alive with construction and development. Arriving at my house and picking up the day’s Gazette I hadn’t finished, I read an editorial of a popular and recurring idea in the Montreal media. Montreal is renewing! The editorial listed all the great developments of the city: Two Super Hospitals in the building, extension of the southern belt 30 highway, a new bridge linking Montreal and Laval islands (actually called Isle Jesus), announcement of a Champlain bridge replacement, refurbishing of the Montreal airport and surrounding highway circle, extension of the public transit systems, replacement of the Turcotte interchange, new skyscrapers in the works (none built since 1992) and a great many other examples of urban renewal. However, are these really the mark of a resurgent Montreal?

A few details escaped the description of my homeward walk, so banal they were to the average born and bred Montrealer that I am. The first was that while standing in the middle of Concordia’s campus, staring at its newer features my back was turned to its flagship buildings, the Hall and Library buildings. These buildings are of such a particular ugliness most of us stop looking up as we walk past them. Nor did I pay much attention to the multitude of grey apartment buildings surrounding the campus. It is actually hard not to draw parallels between this part of downtown and Beirut. That resemblance is further accentuated by the massive pot-holes lining the streets ad nauseam, reminding us of Lebanon circa 2006 (apologies to the Lebanese for the hyperbole). Another over looked detail is the neighbourghood hiding in the shadow of the old Seville Theater development, Shaughnessy Village. One of the more depressingly poor and socially ill quarters of town, with its streets strewn with drug users, aboriginal poor and its sad overcrowded women’s shelters. Even Westmount the richest neighbourghood in Montreal as decaying streets filled with cracks and pot-holes.

While the certain media gushes about urban renewal, most journalists and commentators know this to be superficial. Underneath the glimmer and hope of new construction, lays a deep corruption. Montreal’s construction industry is one of the most corrupt in the western world and openly so. Foreigners reading our press may be confused as to whether they are reading a Canadian daily or a southern Italian one on most days. Most city procurement or maintenance contracts are rigged. These problems are small in comparison to the larger issues facing the city. While once the most populous city in Canada and first to reach a million inhabitants, Montreal lost that title to Toronto in 1976. While Montreal used to be a commercially imperial city second in clout only to London in all of the British Empire, Montreal long ago relinquished those epithets to the likes of Toronto, Hong-Kong, Singapore, Sydney, Mumbai and Johannesburg. Montreal also used to be home to some of the greatest corporations in Canada, many of whom have left. Adding insult to injury some of the great names that left were named after the city: Bank of Montreal, The Sun Insurance Company of Montreal.

Although Montreal has been the subject of some renaissance of activity, undeniably the city endures a stagnant state of affairs when compared to thriving cities like Toronto, Vancouver or Calgary. The causes of Montreal’s ‘greatness’ demise are all documented and obvious. The advent of a separatist and anglophobic  mouvement in Quebec’s political life are the main culprit. Separatists have always believed that Quebec and Montreal by extension were great because they are francophone. Nothing could be further from the truth. What makes Montreal great is its bilingual and bi-cultural identities (now more multicultural than ever). The attempts by ethnocentrical separatists to preserve french or more exactly to enhance Montreal’s french heritage has been an attack on Montreal’s very soul. This situation has arisen because governments in Quebec are formed by constituencies outside of Montreal in its francophone heartland. The government’s vicious cultural and economic attacks on the city have been further compounded because the seat of governmental power resides outside of Montreal, where ignorance about the true strengths of the city are rife.

Montrealers need to wake up and understand that what plagues their fair city is the city’s lack of sovereignty. Quebeckers once led political and constitutional battles to become as they would say: “Maitre chez nous!”. Or master in their own house. It is high time Montreal embarked on such a quest for economic and cultural independence. As an anglophone friend of mine was telling me the other day, she is tired of our province’s petty and destructive language wars and she is considering moving to another province for better work and more ‘political peace of mind’. What I heard in her lament was disheartening to say the least. Many Montrealers feel the same, they are tired of having people in Saguenay or in Gaspésie telling them what language they need to work in and what culture they should be instilling in their children. Enough with the outside influence already.

What Montreal needs is to become a Chartered City. Like Hong-Kong being freed from China to pursue its own destiny Montreal needs to be free from the cultural dictatorship that strangles it. Montreal needs to be free from the petty politics of separation. Montreal needs to be free to work and grow in the language that bests suits its aspiration to rival some of the Worlds great metropolises. Montreal needs to free itself from the pervasive anti-business, anti-wealth mentality that corrupts this province. Montreal needs to stop waiting for a distant government to prosecute the criminals that daily rape the islands treasury and tax payers, she must do it herself. Montreal needs to be free from the ineptitude of its provincial political duopoly.

To move forward and become the great metropolis it was destined to become Montreal needs to take back the assets that make it great away from those that would have them be chains. French should have made Montreal greater than just another anglophone city in North America, instead, it has become its greatest drag, a secular dogma weighting it down and prohibiting enlightenment. Montreal must become a “Bill 101 free zone”, it must become a separatist free zone, it must invite the legions of hard working industrious anglos to come back to their native island. It must demand that all infrastructure building and conceptualizing be repatriated away from Quebec City. It must firmly but curtly ask the rest of Quebec to butt out of its affairs. Montreal needs to start thinking of itself as an aspiring city of Lights. Hope and ambition are the greatest fuels for change and progress. Let us together reclaim the spirit that made Montreal the center of the Universe in 1967.

Montrealers could not tell you why they believe their city is the greatest. Montrealers cannot describe why they have faith Montreal will some day erupt into one of the greatest urban cores of the World.  Montrealers wont even tell you about this faith so crazy the notion must seem to outsiders. It is time for us to grab our pride by the buckles, raise our heads and forge ahead to where our true destiny resides. Our mission should be: to never again let an off-islander impose their timidity or apathy on us and to never let one of us leave because the pastures are greening faster on the other side.