Taxpayers to remain on the hook for billions of dollars worth of bank wholesale debt until 2014

Taxpayers to remain on the hook for billions of dollars worth of bank wholesale debt until 2014

By Gareth Vaughan

The taxpayer will remain on the hook for bank bonds worth billions of dollars that are covered by the Crown wholesale funding guarantee scheme for another three and a half years despite the scheme having been closed and despite the Australian parents of local banks now buying back their Australian government guaranteed wholesale money.

The latest Crown financial statements show that, as of February 28 this year, the value of wholesale bank securities guaranteed by the taxpayer was NZ$9.8 billion. No provision has been made in the government's financial statements for losses under the wholesale scheme as Treasury considers the possibility of losses a "remote" one. Under the wholesale guarantee scheme banks were able to effectively rent out the government's AAA credit rating to raise wholesale funds during the global financial crisis.

The wholesale funding guarantee facility effectively closed from May 31 last year after the Crown had issued a total of 25 guarantee certificates. However, the benefit of the guarantees stays for the securities until their scheduled maturity (the banks issued guaranteed debt for terms of between two and five years), meaning the money progressively matures right through until October 2014.

Of the country's big five banks, only ASB didn't raise any wholesale funding under the scheme. BNZ Treasurer Tim Main says his bank has about NZ$2.4 billion of government guaranteed debt on issue. The latest figures from Westpac and ANZ's general disclosure statements show Westpac had NZ$4.1 billion as of its September 30, 2010 financial year end, and ANZ had about NZ$3.03 billion worth at the same date.

Kiwibank has its A$250 million (NZ$332.9 million) five-year Australian bond issue covered. Due to mature on October 20, 2014, the expiry of the state owned bank's wholesale guarantee certificate will bring the curtains down on the scheme.

However, much of the guaranteed money doesn't mature until 2014. Westpac has US$1.325 billion (NZ$1.7 billion) maturing in July 2014 and BNZ has substantial yen denominated maturities in 2014 plus about NZ$595 million in local currency. ANZ has US$171 million (NZ$217 million) maturing as far out as 2014.

Should any of the banks with wholesale government guaranteed debt on issue get into trouble before the debt matures, the taxpayer would have to foot the bill.

Aussie banks buying it back

In Australia the major banks, owners of New Zealand's ANZ, ASB, BNZ and Westpac - have increased their efforts to buy back tens of billions of dollars worth of Australian government guaranteed wholesale funding as they strive to replace it with cheaper funding.

However, the banks here won't be following suit. For whilst their Aussie parents pay monthly fees on all their outstanding guaranteed debt, their subsidiaries here had to pay Treasury fees upfront when each guarantee was granted, and Treasury says they're non-refundable.

Main said BNZ therefore had no intention to buy any of its debt back. A Westpac spokesman said his bank would like to conduct buybacks but, because the guarantee fee isn't refundable, there's no incentive to do so.
 
Nice little earner
 
Kiwibank's wholesale funding manager Geoff Martin said: "Under the deed that all banks signed up to it means that the government has already banked the fees. The total fees paid on that scheme are substantial and it has been quite a good earner for the government."

For an overseas issue a fee of 70 basis points per annum was paid for the life of the deal. So, for example, the fee on a US$100 million five-year bond would have been US$3.5 million. See more on the fees here.

"At 70 basis points, if you pay that upfront, it becomes very difficult to buy paper back at an economic level," Martin added.

But unlike the retail deposit guarantee scheme, where the taxpayer faces a NZ$1.2 billion tab after the collapse of nine finance companies, the wholesale scheme has made no payouts and will generate about NZ$290 million in fees for the government.

'Risk averse' investors drove the scheme

The wholesale guarantee scheme was unveiled by then-Finance Minister Michael Cullen in November 1, 2008. It was offered to financial institutions with investment grade credit ratings and "substantial" New Zealand borrowing and lending operations, with Cullen citing an environment where international investors were risk-averse and where many other governments had guaranteed their banks' debt.

"In such an environment, the government believes that it is on balance in the public interest to offer a wholesale funding guarantee facility that can help maintain the economy's access to foreign credit," Cullen said.

Treasury Secretary John Whitehead and Reserve Bank Governor Alan Bollard said in 2008 the main goal of the facility was to support the re-entry of New Zealand banks to regular foreign debt markets, on a scale "commensurate with our economy’s overall financing needs." The guarantee was structured in a way that would encourage issuers to graduate from using a government guarantee as soon as reasonably possible, they added.

Banks using the guarantee were told to maintain an additional 2% capital buffer, on top of the existing required 4% Tier 1 capital already required to help protect the Crown’s position as guarantor.

(Update adds comments from Westpac spokesman).

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From what I heard Cullen did not want to give the guarantee but because of the up and coming election he had to consult the other party namely National who, most fervently, wanted it.  Dear God where will New Zealand be if it is called up.  Like Ireland I suppose but without the hindrance of being part of the euro

The problem is if we hadnt covered it we would have had a finance company collapse which would have impacted many small businesses maybe even close some....Banks wont lend to them....its safer to lend for houses as far as the banks are concerned....so finance companies are essential for capital purchases eg plant and retail....DSE, Noel L. etc must take a decent % of their business on interest free.....GE money left the market and Placemakers etc no longer did interest free deals, must have caused some impact......

Yes its not ideal and its a moral hazard thing, however having the finance sector collapse would have been disasterous....however at least it looks like we are persuing the criminal directors unlike say the USA.....and while some finance companies are clearly insolvent, badly run if not criminally run some are not.....but all of them would have gone. Thats a lot of jobs left right and centre.......

Where would NZ be....finance companies are a smallish % of the scheme, NZ would have shuddered but survived not to badly.........its the banks we should worry about their exposure to residential and farming property is huge and on both sides of the tasman they are all but naked....I wouldnt be in an OZ bank for all the tea in China....

regards

No Steven the New Zealand Finance Companies were a dfferent issue.  This is the big four privately owned Australian Banks. The New Zealand Government on behalf of the New Zealand taxpayers has guaranteed  their foreign borrowings up to, it appears from this article, 2014.  I have likened New Zealand to Ireland because that is what the Irish Government did. The Irish Government on behalf of the Irish taxpayer took over the debt of the private banks and look where Ireland is now.  Up the creek without a paddle.

Intersting, my understandingwas the big 4 didnt want to pay us the premium so are not in it. So we are not officially covering them.....In any case the reality is of course is if they went in-solvent our Govn would have to step in and do so....I wonder if the Govn shouldnt actually be buying re-insurance cover for that risk with the premiums....

Hence I like the RB's plan to seperate out the retail and lending parts....that way we can still eftpos and buy food while the lending is in receivership/bankrupt...

 

rgards

 

According to the article the main banks (excl ASB) are all covered on by the government guarantee until 2014.  Because they did have to pay a premium upfront they aren't going to buy back those debts any earlier than the maturity dates.  The parent banks in Australia are buying back early as they only paid monthly fees for the guarantee.

Note, the wholesale guarantee is seperate from the retail deposit guarantee.

Imagine if one of these big banks did go bust and the govt paid out the wholesale foreign investors while the local mum and dads investors didn't get a cent.

What a joke.

Tax payers are guaranteeing the fat cats and not themselves!

Hence why the RB wats to seperate out the retail and the lending arms....

regards

And it explains why the govt has told Bollard to cut the ocr...to pork the property market and protect the bubble of debt being milked by the banks...QED expect the govt (and of course the RBNZ which we now know is located in the office next door to English in the Beehive) to carry on debasing the dollar value....there is no question about it, they are thieving from those who saved to bail out the banks which blew the bubble when they created the stonking pile of shite they call debt.

So no change then but for tinkering tweaking and fiddling with the ponzi scheme.

The comments Ive seen are the low OCR helps businesses the most....which is what they need...Its simple really you cant get every PI to exit the prperty market at once, doing so would cause a panic and a collapse which would in turn collapse our banking system...

 

It would certainly squeeze out the weakest bank steven and it would be a lesson to the others that they will never again get to play their silly games with the full support of govt and the RBNZ.........sadly that is not the case...the lower ocr is leading to the banks returning to the game of offering 95% loans to suckers...the intent is to protect the bubbles...

The govt intention has always been to bugger the value of the Kiwi$ to eat away the level of debt.....the problem is this amounts to theft from those who didn't splurge and from those who saved.

If you are getting 3% on your cash in a bank.(.they are lending it out at 6%). The govt is taking tax from you on the 3%...and then using the debasement of the currency to steal 3 to 5% of your capital.

This is why savers who can should opt out of bank deposits. The govt and RB don't gives a rat's arse about you. So it is a case of leaving the banks without deposits.

Wolly.....are you a secret libertarian? or anarchist? because some of them want a total collapse....they hate the "system" they see so badly they dont care what the misery and anarchy a collapse would cause...this in effect is what you are "praying" for........

and who would suffer? not the ppl that caused this unless we had lynch mobs....

"Bugger the $kiwi".....its simply not happening on the scale you claim....it probably will but its not directly the Govn's fault, at least this one.

Yes Im getting 3% on my deposits and yes Im paying 30% odd on it...so Im getting net 2%....but thats as close as I can get to a risk free rate of return and core inflation is 1 to 2% anyway....simple...fools rush in where angels fear to tread is my attitude.

So no, savers shouldnt opt out of bank deposits unless they fully understand they are walking into an unknown risk...and an unkown impact....both of which are probably huge and growing

The Govn and RB do care about ppl, to accuse Bollard etc of that is frankly unfair....its just they are stuck between a rock and a hard place....and at the end of the day a deposit is a risk free rate of return. Besides that I fail to see why a deposit account should pay a "decent" rate when its so poorly invested....ie it isnt productive.....

Anyway savers will get the last laugh.....watching the fiscal hawks winning convinces me that we will have deflation this/next year and it will last 1 to 3 decades...so each day your capital is worth more, if you have not lost it that is.

regards

 

 "Yes Im getting 3% on my deposits and yes Im paying 30% odd on it...so Im getting net 2%"....and losing 3 to 5% on all the capital because that's the current rate of debasement going on...and yes it is policy to get this destruction....At a guess, they are thieving at least 2% of your capital on a pa rate this very minute. If the govt wanted to, they could direct Bolly to aim for inflation below 1%. Ask yourself why they don't do that.

The core inflation rate is about 2%, so the debasement is not 5%....and like I keep saying its a risk free rate of return.....that's the choice Ive made.

Inflation of < 1% simply doesnt work, you cant control at 1% when the margin of error is +/- 1 to 2% it would be at the least un-stable.....at worst a tail spin into deflation.

regards

How can you claim inflation is 2% and then say the margin for error is 1 to 2%!!!!!!!

Wake up steven, inflation is near 5% right now.

"Risk free".....utter bollocks....none of the banks offer the gov G at that rate you have taken...yet they have a govt G over their foreign borrowing....

A bank failure would see your funds frozen at best....look what Piggy did late at night with the psis.

Be honest steven...what you are getting along with all the other savers on that rate is a loss of about 2% pa.

If you were in Trustpower your divs would be fatter than your bank % and fully imputed and there would be no problem turning the shares into cash when you need it. So why feed the bank so they can prop up the credit bubbles offering cheapo 95% mortgages!

Wolly if you think every loan banks are doing is at 95% then change what you are smoking!!!!

Can I suggest you appear to know bugger all as to what is really going on in the Banks system  in regards to lending.

And Trust Power is a risk free investment against a Bank????? Hello. You are getting a higher return for the relative risk!!!!!!!    Investments 101!!!!!

 

Buy some Apple shares , Wolly ! ............ London-to-a-brick you'll gain more than a  2 % p.a. return .... . they're up 3 % in after-market trading today .

....... And the company is sitting on $US 65 billion in cash . Estimates are that this hoard will rise to $US 90 billion by year's end .

[ and if the $NZ sinks back to saner levels , you get the benefit of an exchange rate gain to-boot . ]

No, I'm investing in making sure JK and BE keep their word re the pension! and waiting for the big copper drop to come...oh and buying a bit of land.

What if Jobs kicks the bucket, though? He looks a bit thin..

 

Might take a while to recover the share price after that.

Apple has enough market leadership with it's current products , to give it revenue momentum for some considerable time ahead , with or without Steve Jobs . They have 80 % of the tablet market , alone .

........ and wander into any mall in the US , and there is Apple's own branded stores , crammed to the gunnels with eager beaver buyers .

I don't think it's about wanting the banks to collapse.  It's about expecting them to act responsibly and monitor market and credit risk in the same way as any other business. 

During the financial crisis the RBNZ constantly stated it was confident in the banking system.  For years the RBNZ was concerned at the overheating property sector but still allowed it get out of control.  For years the RBNZ was concerned about the level of foreign borrowing by the banks.

Problems arose when the banks were facing difficulties in accessing further foreign borrowings to repay earlier debt (ponzi scheme?).  This is when the RBNZ stepped in to alleviate these liquidity issues.

What was initially referred to as a correction then became a weakened housing market with a further downturn posing further risk to the banks.

What we had were unexpected market conditions that should've been allowed to play out.  If one of the banks did look like it was going to collapse maybe the govt could've stepped in then.  At least it would've highlighted the flaws in the banking/financial system.  I doubt any of the banks would've made a call for immediate repayment of mortgages.  The banking system had already shown that it could actually handle a correction in house values.

The low OCR was to encourage spending showing that our economy runs on consumption and not production.

Yep, total bullshit.  My understanding is that the OCR used for controlling price stability - inflation/deflation and has no real bearing on the banks borrowing costs especially given the amount of foreign borrowing they are involved in.

 "Households and banks need to realise that the recent period of cheap international money has been unusual and at some point is likely to revert to more normal financial conditions, Reserve Bank Governor Alan Bollard said today

“Of course the inward capital flows would not have happened without a strong domestic demand for borrowing. It is New Zealand households’ desire to keep investing in housing, while at the same time consuming strongly, that fuels their demand for funds,” Dr Bollard said. “New Zealanders need to think about other eventualities ahead, and in some cases show less exuberance.”

Monetary policy continues to work despite these distortions, but its impact has been muted as borrowers have been able to access longer-term fixed-rate mortgages driven by lower international rates than by the short-term rates affected by the Bank’s Official Cash Rate (OCR)." - RBNZ March 2007.

So we had an economy built on foreign borrowing, housing and consumption which had the RBNZ concerned.  When the financial crisis hit our central bank was confident that the main banks were able to withstand the shock as they were financially sound and didn't participate in the same practices as the dodgy banks overseas.

But, when it got tough for the banks to access foreign borrowing, when it got tough for households because they'd overextended themselves, guarantees are provided and the OCR is slashed so that the economy can be rebuilt on foreign borrowing, housing and consumption - the main factors that created the illusion we had a strong economy in the first place.

 

Again you display a poor grasp of reality Westminster...do please pull your head from the sand.

Domestic funding....this is why the banks are now allowed to carve off some mortgages to lend out as a "bond" giving the owner preference over depositors, so this is higher domestic funding and private savings? yeah right.

You are day dreaming.....

regards

 

The house sales volumes speak of a distinct change in attitude, meh. Compare sales numbers for '06 & '07 with the last 12 months. Numbers down a lot, prices down a bit, and average LVR down noticeably. The required deleveraging is happening. Those 95% loans appearing now have much tighter strings attached.

Depends what city you're in Vera.  How do you explain the volume of mortgage lending over the last couple of months?  I don't see a lot of expansion in the productive sector.  The reduced sales volume had more to do with the supply side of housing.

The sales are at the high end mostly....this matches the UK where the ppl with money are buying bigger....which makes sense ie invest it out of the way of any Govn [tax]  grab....assuming there is no market downturn....again though high end houses i assume wouldnt drop as badly...

regards

That’s pretty scary and ridiculous looking at the way the banks are lending again, right up to 95% LVR.

I thought it was only an emergency measure?

 If one of them goes under, it will definitely bankrupt the country now the way things have being going.

When are these guys going to realise they can’t afford to bail everything out?

Solid data and analysis, not pie in the sky day dreaming....

regards

 " we've just been through the biggest financial collapse"........you don't get it do you Westminster...for you the earth is still flat....news flash Westminster...we have not "been through", we have only just entered the maze of debt, lies, corruption, losses, bailouts, boondoggles and money printing scams....... 

Wolly, stop selling windscreen wipers, telling reality – people beginning to hate us – in case they not already do.  

I read lots, Westminster, for instance "....we can see a very strong and clear uptrend since the lows back in March 2009. This remains the predominant trend for  the United States, and it would take a mighty big pullback to threaten/break this trend. But this is the one to watch, for a big move to the downside-when it comes, which of course, it will."

Nicholas - Did you read the 'Deep T' articles on 'mortgage hypothecation'.  Any opinion?   What would distinguish/isolate us from Australia in this regard? Just tell me its not true please...

Great piece.....its similar in the USA I believe and housing has dropped 30% odd....which begs the Q why havnt they gone bankrupt, answer they are a) backstopped by the Govn and b) the Govn no longer requires them to report the truth so a) doesnt take place....

I would assume every bank in an "advanced" country is the same but Im hoping with Bollard NZ is different Im not sure how much though due to OZ. By this I mean if our RB insisted that we have way more conservative methods/valuations that may still allow an OZ parent to say no problem the capital is simply in NZ so we can fiddle our %s based on that capital and lend even more in OZ.!............however a bankrupt parent I assume effects us here........

regards

 

It's an appalling situation and you have to take it for what it is

PRIVATIZED PROFIT / SOCIALIZED LOSSES 

People above have mentioned Ireland but least we forget the courageous people of Iceland - the only way they got of the hook from a generation of paying back bank loss debt was a consensus with a vote 60/40% against socializing the losses. 

I ask you what business is it for our government to basically insure and lock in bankers profits? And how is this in the people of NZ's best interest?

I guess I must be a conspiracy guy now because when I ask myself who runs this country government for the people or bankers for personal profits? I come up with the later.

When people above talk about too big to fail banks what they are actually saying is that there should be or there is one law for banks and another law for everybody else and I think that this is dangerous. 

No,

It is very much the business of govn......

To big to fail means if they failed our financial system would collapse and no one would be paid so no one could buy food to eat.....that's a pretty serious situation....at this point to stop anarchy the Govn has to step in....where at least in the US its failed is then not to prosecute left right and centre and send lots of bankers to jail.......

Its not one law for bankers and one for us, its one law of keep things going....to protect us....

Finally after decades of hands off, free market economics whic is now becoming clear is a total failure the Govns have figured out it was a very bad idea and are now trying to do something.....however there is a huge difference when increasing a burden ie change on a healthy bank/business has to carry and the burden an un-healthy one can carry...ie we are in or almost in intensive care.......the Govns are standing there with the shock paddles worried about having to use them but petrified of the outcome if they dont.  Lehman showed them what would happen....

At some stage hanging the likes of Paulson and a few bank CEOs should take place IMHO....effectivley they have killed ppl....

regards

 

Bullshit steven...it is a case of one law for them and another for the masses. The fact that Key's govt is deliberately porking(ocr decision)(covered bond decision) the property sector to protect the bank bubbles of debt, to keep the economy from diving into a depression....is indicative of the critical need for govt to rid the nation of "too big to fail" bloody corporate parasites whether they be banks or insurance companies....

It is up to Bollard to bash through with an OBR and other rules that put the banking sector in a stranglehold of regulations restricting each banks position to ensure no one bank reaches beyond the point where failure threatens to lead to a domino crash.

I doubt Bollard will be allowed to do this. I suspect the influence the banks have over Key will lead to Bollard being appointed to a political post overseas and his replacement by a trained monKEY who will do the bidding of the banks and their lapdogs in the Cabinet. You will note they have rid themselves of Whitehead at Treasury....to be replaced by?????

 

Dont forget your tin foil hat wolly....

Bollard wants seperation, however its now probably too late to get it in time...it would take years to do not months.

regards