Digging Deeper on the GM Loan Repayment
Last week’s announcement by GM that is has fully repaid the loans it received from the U.S., Canadian, and Ontario governments (years ahead of schedule, and with interest) was greeted in most circles as another positive sign of the auto industry’s modest recovery.Â Since the dark days of last June (when Chrysler was shut down entirely), the Canadian auto assembly sector has clawed back 5000 jobs — and another 4000 have been added in the even-harder-hit parts industry.Â (Dont forget, though: That still leaves us 40,000 auto jobs below where we were 3 years ago … so we can’t possibly conclude that the crisis is over.)Â Real GDP in assembly has rebounded by $4 billion (at annual rates) since June, and by $2 billion in parts.Â Add in the spin-off jobs (7-to-1 for assembly, including the parts jobs), and this rebound constitutes a major portion of the gains in Canadian GDP that have been recorded in recent months.Â Indeed, these two sectors directly account (not counting spin-off linkages) for about one-fifth of the growth in business sector GDP in all of Canada since June.
Derek DeCloet in the Globe and Mail was an exception to this positive response: there’s nothing the auto industry could possibly do to make Derek happy (except perhaps pack up and move away).Â He grumbled that the government is still subsidizing this company, and ridiculed GM’s TV ads as a publicity stunt.Â (Of course they were a publicity stunt, Derek.Â That’s what advertizing is, you silly.)Â Please stick henceforth to covering the government-subsidized state-protected financial sector, Derek, and spare us your Bay-Street-centric rants on the real economy (that is, the part of the economy that actually produces goods and services — rather than buying and selling pieces of paper).
On one hand, however, DeCloet is right, and we shouldn’t get too carried away with optimism about the repayment.Â The loans represented only about a fifth of the total assistance GM received from the three governments (U.S., Canada, and Ontario).Â The rest was in the form of equity, and it will take a lot longer before that ever gets “repaid” to the governments.Â Nevertheless, who would have dreamed a year ago (when GM was on death’s door) that it could generate $8 billion (U.S.) in free cash flow to repay the loans.Â And if the repayment generates a bit more confidence among GM consumers about the company’s long-run viability, that will have a reinforcing effect on its sales (and hence on jobs) – all the better.
Â More good news came when GM announced $850 million (U.S.) in new capital spending in its engine plants, including a big swack in St. Catharines Ontario.Â That new equipment will help GM fulfil the far-reaching Canadian content commitments it made in the powertrain area, as part of the rescue effort last year.Â Canadian negotiators squeezed GM hard to increase their proportional commitments to Canadian production (of both assembled vehicles and powertrain) as the quid pro quo for the proportional Canada-Ontario commitment to the rescue effort.Â
The main man in this regard was Mr. Paul Boothe, an unassuming, consummate federal civil servant who proved in the heat of battle that he could negotiate with the best of them.Â If only all our public officials were as determined and skilful in their efforts to pro-actively win real investment and real opportunities for our industries.Â The St. Catharines announcement is in large part the fruition of the efforts by Boothe (and all the other stakeholders in last year’s rescue, including the provincial government and the CAW) to negotiate a package that was much more than a bailout.Â Rather, it was a recipe for a reaffirmed Canadian presence by these two lynchpin manufacturers (GM and Chrysler).
There are a couple of more dimensions to this fascinating story that are worth exploring:
1. The federal and Ontario governments have already recouped over $2 billion of their contribution to GM, and there is clearly more coming (though we don’t know when).Â The Harper government’s decision last year to write off every penny of the auto aid and thus build it all into last year’s deficit calculation (which I questioned at the time as curious and even misleading) has already been proven wrong.Â Since the money was already “written off” by Ottawa as a loss (on grounds that they had little confidence it would be repaid – contradicting their own assurances at the same time that it was an “investment,” not a bail-out), any repayment will come as a gain that can be recorded in the budget on the revenue side.Â Jim Flaherty has learned from past Finance Ministers (especially Paul Martin) that it’s always politically better to make the budget situation look worse than it is (even when the bottom has fallen out of the balance), thus positioning yourself to triumphantly announce “surprising good news” (due, no doubt, to “careful fiscal management”) down the road.Â The auto package could thus generate as much as $10 billion in “surprising good news” for Ottawa in the years to come (depending on the ultimate worth of the public equity share).Â It should never have been written off as a “deficit” in the first place (it really is an investment, I would argue).
2. Likewise, calling the auto aid “stimulus” was also misleading.Â Remember the government’s fishy claim that their total stimulus effort amounted to $40 billion or more (over two years)?Â Almost a quarter of that was the auto aid.Â It was important for preserving jobs, for sure.Â But does it count as “stimulus,” in the sense of stimulating expenditure?Â I don’t think so.Â It was more in the realm of a balance sheet transfer that kept an important company going.Â If the auto aid was “stimulus,” then so too was the much larger line of credit which Ottawa advanced to the banks (they could have tapped $200 billion under Mr. Flaherty’s EFF mechanism) – all of which was also repaid.Â In that case, Ottawa’s “stimulus” was more like a quarter-trillion dollars … far outpacing everyone else in the OECD as a share of GDP!Â Of course that’s nonsense.Â This was just one of many ways that Ottawa inflated the true value of its stimulus effort last year (including counting as “stimulus” the increase in EI payouts that automatically accompanied last year’s mass layoffs).
3. The loans that GM repaid came from the Export Development Corporation, which runs a usually low-profile business assisting Canadian exporters with lines of credit, payment insurance, and other financial intermediation.Â Amidst the crisis last year, the federal government gave EDC a much broader mandate (including investment banking to support key Canadian exporters), backed by modest contributions of new share capital (which, again, count as an investment, not a current “expenditure,” and hence don’t count in the deficit).Â EDC, like any other bank, is then allowed to leverage its capital into multiplied amounts of lending to businesses.Â That’s what private banks do all the time.Â The only difference is that private banks do this to maximize their own profits (hence generating the bankers’ cycle, through which the volume of credit created for the economy fluctuates wildly and destructively, depending on the collective mood swings of the bankers).Â EDC, in contrast,Â is mandated to create credit it in the public interest.
This proves the value of something that Canadian lefties (including me, Andrew Jackson, and various incarnations of the Alternative Federal Budget have been advocating for years): the creation of a National Industrial Investment Bank to channel steady, attractively-priced capital into strategic Canadian industries in the real economy.Â Utilizing public vehicles of credit creation (rather than relying solely on private banks and other private channels, like the stock market) would be a very valuable tool to support real industrial development in Canada.Â And this lending is NOT government “spending.”Â Rather, it’s using the power of credit creation for the public good, rather than private greed.Â In my view, the EDC should keep the money repaid by GM and reinvest it in further industrial lending to support other key export-oriented businesses.Â In essence it would thus become the public investment bank we have been advocating.Â Derek DeCloet and his ilk would go bananas about the intrusion of politicized government into a realm that they assume should be the exclusive preserve of rational, private bean-counters.Â I think that after the last two years, we can all come up with about a dozen counter-arguments to the assumption that “private is best,” when it comes to lending and finance.
4. Finally, GM’s quick repayment of the loans has whetted the appetite of some commentators (including DeCloet) for the ultimate repayment of the full government contribution.Â That would occur through the issuance of public equity by GM and Chrysler, creating a market for those stocks into which the government would presumably sell its shares.Â There is even some nefarious language in the rescue packages requiring the government to sell off its shares within specified, relatively aggressive timelines.Â The more I think about it, the less this makes sense – neither for the auto industry, nor for taxpayers.Â Why not hang onto the equity stake?Â If the companies recover and the equity gains market value, then the government will be able to claim that on its balance sheet (hence officially recouping the cost of its written-off contributions and creating a budgetary gain).Â That could well generate better value for the government than a quick, premature sale.Â More importantly, the government’s continuing equity participation would help to maintain the company’s focus on the public interest (not just the private interest) that the Canadian footprint succeeded in introducing.Â There are other highly successful automakers in the world where host governments maintain an important minority stake (including Volkswagen and Renault).Â The Canadian and U.S. governments should investigate doing the same thing, before rushing to dump an asset which could, ironically, turn out to be one of the best investments they’ve made in decades.