© Andrew Vaughan/The Canadian Press files The construction site of the hydroelectric facility at Muskrat Falls, Newfoundland and Labrador is seen on Tuesday, July 14, 2015.

By Walter Schroeder

For 40 years I had the privilege of building one of the world’s largest debt-rating agencies — DBRS. I saw the backroom financials of top-tier organizations and governments and was able to examine and find patterns and make market-moving decisions.

Using this lens, I conclude Newfoundland and Labrador (N&L) is on the brink of bankruptcy. Without intervention from the federal government, the province will go broke. The fall will be precipitated when the rating agencies soon start cutting N&L’s credit rating.

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Muskrat Falls’ debt will be the final straw that leads to rating cuts. Based on analysis of N&L’s financials, I see Muskrat Falls leaving the province’s decision-makers with two unviable choices: raise the price of electricity to 23 cents KWH from 13 cents today or raise taxes to cover the debt.

Steep hikes in electricity prices will result in some Newfoundlanders freezing in the dark. Half the province’s electricity is used for home heating and much of the rest is used in manufacturing and industry. Higher electricity prices would deeply hurt the economy.

The alternative is not much better; raising taxes would be a capitulation that the $8-billion Muskrat Falls debt is now a burden of the taxpayers, not electricity ratepayers’. But the reality is the taxpayer is as unable to shoulder this burden as the ratepayer.

With neither of these options viable, N&L is forced to swallow this debt. What rating agencies will note is that the province’s debt has reached an eye-popping 76 per cent of GDP, compared with an average of about 35 per cent in the other provinces. Interest costs chew up nearly 20 per cent of N&L revenue versus closer to seven per cent for a typical Canadian province.

In layperson terms, this means that N&L has too much debt and can’t service it.

To make matters worse, the province’s economy has been experiencing very low growth and its unemployment rate is 11.9 per cent. Two mega-projects of long duration — Muskrat Falls and the Hibernia oilfield — are winding down at the same time, with nothing to replace them. On top of that, a collapse in world oil prices doesn’t help.

Although the federal government has appeared at the negotiating table, there seems to be a real lack of interest or commitment to improving the economy in Newfoundland. The province remains badly penalized by the current equalization formula, which is designed to help poorer provinces attain tax revenue equal to the Canadian tax average. Simply put, Ottawa pays out to have-not provinces the extra tax revenue they would earn if their tax bases were closer to the national average. Although N&L received equalization from 1957 to 2008 it currently receives nothing, despite the financial hardship it is facing.

Today N&L’s relatively high credit rating is built on the assumption that the federal government will bail out any province that goes bankrupt. To date however, we have not seen movement from the federal government to support Newfoundland, particularly around the impending $8-billion Muskrat Falls debt that will fall on the province’s books. It is becoming clear that this assumption could be wrong. Once rating agencies have a close look at the province’s finances, the cost of funding its $13-billion debt will skyrocket and drive the province further into debt, and eventually, bankruptcy.

Politicians who discuss N&L, apparently without deep concern, risk letting the clock tick until the rating agencies downgrade the province. Friendly noises from the federal government about helping with electricity rates won’t suffice. The time for action is now. The cost of any solution will only rise as the province moves closer to bankruptcy.

Walter Schroeder founded both DBRS and the Schroeder Policy Group.