Monday, November 10, 2008

“Flaherty focuses on availability of credit”?

Today’s Globe headline states that “ Flaherty focuses on availability of credit."

This is a noble cause, however I truly wonder for whose benefit Flaherty is seeking this availability of credit? Is this credit being sought, for example, in order that parents can borrow to fund their childrens’’ education or that the automotive sector can survive, or is it being pursued for frivolous reasons of the past, such as allowing Teacher’s to lever BCE up with $32 billion of totally unnecessary debt (on top of BCE's $12 billion of existing debt)?

In this economic environment where debt is the last thing that any prudent individual should want more of, the government should step in to prevent the LBO of BCE. This deal should never have been permitted in the best of times for a litany pf reasons. Now more than ever it should be stopped, since it is sucking up $32 billion of Canadian credit capacity in order to achieve what ends:

(1) more layoffs, beyond the 2500 mandated by BCE’s new LBO purchasers and only made necessary by the LBO itself?

(2) the privilege of having Ottawa lose $800 million a year in taxes, since the interest payable on this $44 billion mountain of debt is deductible from corporate earnings and not subject to withholding tax (courtesy of Flaherty)?

(3) hobbling Canada’s largest telco with $44 billion of debt to service, thereby causing it have cut back significantly on capital expenditures, and devote those monies to otherwise needless debt servicing instead?

(4) saddling consumers with the burden of higher service costs and taking price pressure out of the industry to make the overall costs to consumers higher?

(5) introducing needless credit risk into the Canadian economy and placing Canada’s largest telco in a precarious credit default situation?

If Flaherty is truly interested in improving the availability of credit, where many businesses may be shuttered because of the lack of credit availability, he needs to husband the availability of credit and make credit available for those who truly need it. Canadian taxpayers should have no role whatsoever in making credit more available, if all those measures result in are more leveraged buyouts, like the LBO of BCE, which in the end only cause more tax losses ($800 million a year in the case of BCE), and do nothing to make Canadian enterprise more vibrant.

Bottom line: The LBO of BCE is about to suck up $32 billion of available credit, to support a frivolous transaction for a company that has no real need for the money. This credit is better used to grow other businesses and to prevent other businesses from failing. Thi credit extended to BCE will only serve to make BCE more likely to fail, rather than less likely to fail. There needs to a needs ranking of available credit introduced by Falherty, before any tax payers money is put at risk. On that basis, the $32 billion of credit to complete the LBO of BCE would be at the bottom of the list. TD Bank needs to take a pass, or forego any form of credit extension involving Ottawa. Meanwhile the global financial system meltdown would be relived significantly if the other foreign lenders to BCE were asked to direct their lending to other more worthwhile undertakings in Canada as opposed to the LBO of BCE. At least these banks could lend on the basis of loans that are worth par, rather than some 85 cents on the dollar, as in the case of the LBO of BCE, and their equity reserves wouldn’t be taking a major hit from the get go, in the order of $4-5 billion.

Where is the financial prudence in any of this? Credit availability is a zero sum game. What other, more important, undertakings are bieng denied in Canada’s economy in order to perpetuate the LBO of BCE, something that should never have been approved by Jim Prentice, as Industry Minister, in the first place?

1 comment:

Dr Mike said...

What the hell would Flaherty know about credit--he is a lawyer for God`s sake.

Unless credit is spelled A M B U L A N C E , he probably missed it.

Dr Mike Popovich.