Bloomberg says the mayor's bad reputation is starting to drive up the City's borrowing costs, but is it?
After the Rob Ford crack scandal got underway in May, the City Manager’s office set out to do some work behind the scenes. Someone had spraypainted “Crack Head” on City Hall’s newly installed doors, so those had to be fixed. There were a deluge of queries from international media regarding the sensational accusations against the mayor, so those had to be addressed, too. But one e-mail from City Manager Joe Pennachetti, obtained by Torontoist as part of a freedom-of-information request, showed where the bureaucracy’s primary concerns lay. Pennachetti, the City’s top civil servant, responded to a Bloomberg article sent to him by one of his staffers. In it, the financial news service described how Toronto bonds had outperformed their peers despite the mayor’s scandals, and Pennachetti seemed relieved. “Thks!” he wrote. “Good to hear that Finance sector looks at our facts!”
On Wednesday morning, Bloomberg published another article about Toronto bonds, and this time it wasn’t as flattering. The story drew a connection between Toronto’s cost of borrowing and Ford’s implosion, highlighting a four-basis-point increase in the credit spread between Toronto and Canadian federal bonds in the past week, which isn’t good.
(For those who don’t know, credit spreads are the interest difference between two different bonds. So the market might historically price a 25-basis-point spread between Toronto and Ontario debt, because municipalities are seen as riskier. But if this spread increases to say, 40 basis points, then investors might panic and wonder what the underlying reasons for that are, and how their investment is performing.)
When contacted about this, City staff pointed out that a better measurement of municipal bonds is how their credit spreads deviate from those of their provincial counterparts. Toronto bonds have moved in sync with Ontario bonds over the past week, showing that the increase in borrowing costs relative to federal debt may be happening for some reason other than the mayor.
Interest rates for orders of government are a very sensitive subject, because they’re somewhat volatile. The City issues debt in the form of bonds. The bonds are bought by institutions in the primary market (like, finance syndicates or investment banks). But then the bonds get launched into the secondary market, where they’re freely traded among investors. How the market trades that debt says a lot about how the City is seen from a business perspective, but it doesn’t affect how much the City pays on the already-issued bonds. However, the City’s reputation does affect future costs, because if the secondary market doesn’t like how the City is performing, then it will demand a higher return on its bonds next time, which forces the City to accept higher interest rates on its debt in the future. The City hasn’t issued any debt in the past week, so any changes in interest rates over that period of time would have to have happened on the secondary market.
Toronto’s government has annual approval to borrow up to $900,000,000 a year, which it does in $300,000,000 tranches. The City, which maintains a strong AA and AA1 credit rating, will issue $600,000,000 of debt in the second quarter of 2014; a four-basis-point increase in interest rates like the one Bloomberg claimed the mayor is responsible for would cost an additional $240,000.
While this would be a minimal cost in the scheme of things, negative movement in the secondary credit markets could be seen as an indication of how Toronto is perceived, from a financial and business perspective.
One survey indicates that the Ford imbroglio has hurt Toronto’s brand globally. A news report has the City scrambling to reassure Austin that its recently signed “music city alliance” is still cool. Meanwhile, companies as diverse as the Toronto Argonauts, Canadian Tire, and Iceberg Vodka are distancing themselves from the mayor.
Ford has regularly pitched himself as a champion of business who runs the city the same way he’d run a private enterprise. Tonight, he plans to attend a business gala at Casa Loma with 500 investors, developers, and other individuals. Whether the Rob Ford spectacle will hurt Toronto’s economy remains to be seen. Politicians are normally to supposed to exude calmness, confidence, and stability—traits that seem lacking from the mayor’s office these days. Until things change, expect City staff to continue to worry about the Ford saga. We may not know the true value of Toronto’s reputation until it’s completely chipped away.