Ontario's Debt: Rolling over Bond Issues
As Finance critic I felt it important to get a sense of Ontario's current debt situation given the recent and evolving situations in Greece and Italy. How vulnerable is Ontario to interest rate fluctuations? The province's debt is made up of bonds of varying interest rates and maturity dates. Mainstream media coverage is usually limited to quoting absolute dollars ($240 billion in debt, $16 billion deficit) and there is no time to dig into the details. So I'm digging into the details myself. Politics aside this is just livelong learning in practice.
Ontario's debt is managed by the Ontario Financing Authority (OFA) and they have published a database of Ontario's current bond issues which I have converted to a Google document that you can dig into as well. See below for details on my assumptions about this data.
Let's begin by breaking up the total debt by the year the bonds mature:
- In 2011-2015 Ontario will roll over $75 billion (35%) of debt.
- In 2016-2018 Ontario will roll over $30 billion (15%) of debt.
- By 2018, when the Liberal's plan to return to balanced budgets, Ontario will roll over $105 billion and %50 of the debt.
- None of the above includes new debt that will be taken on until the budget is balanced.
What I am not able to determine is whether or not the current maturity schedule is typical. I could answer that if the OFA Bond Database included historical bond series. Perhaps it's time to file my first ATIP request.
The next chart shows the "cummulative percent amount due" where right now 0% of the bonds are due and in 2048 100% of the bonds have come due. The line in between represents how much of the current bonds are set to have matured by that year.
- There are clearly two slopes at work with 2021 being the change point.
- In 2021, 10 years from now, two thirds of the bonds are scheduled to have matured.
- In 2041, 30 years from now, all the bonds mature.
- Approximately 2/3rds of the bonds mature by 2021. That's why the line is "smoother".
- As Ontario issues new bonds that mature beyond 2021 that portion of the curve will smooth out as well.
- The next time you hear someone say "the markets are calm" during a business report think of that line: the OFA's goal is to keep it smooth.
In reality we never pay off the debut though. Bonds that mature in 2012 are paid by new bond issues that will mature on their own schedules ("the rollover"). If OFA maintains the above system as a general practice then next year the "slope change" will occur at 2022 and the chart will near 100% at 2042.
The trap that Italy and Greece have fallen into is their short term borrowing costs have gone up, and Greece's long term borrowing abilities have simply vanished. Who wants to buy a 30-year Greece bond right now? Whatever system their version of the OFA had in place was disturbed due to the market's losing confidence in their bond issues. Greece can no longer do bond issues and maintain a predictable short/long-term mixture.
That's it. I'll save the partisan rhetoric for after the economic update. Class dismissed!
- The amount issued and amount outstanding columns are the principal while the coupon column is the interest that will be paid at maturity.
- I've decided to ignore the coupon value. If my first assumption is correct then this means all of my debt projections are conservative because they ignore coupon payments that would need to be serviced from the budget or by taking on new debt. If my first assumption is incorrect then my analysis still makes sense and is not distored by including fictional "interest on interest".
- I converted bonds in foreign currencies into Canadian based on today's interest rates.