Reserve Bank slashes its exposure to French and US govt securities, ramps up German exposure

By Gareth Vaughan

As the European sovereign debt crisis and United States economic downturn rumble on, the Reserve Bank has revealed it's punting on Germany, Austria and the Netherlands standing firm and has slashed its holdings of French and US securities and doesn't have exposure to the so-called PIIGS nations.

The central bank's annual report,  shows a NZ$144 million profit for the year to June 30, compared with a loss of NZ$111 million the previous year. As of June 30, the central bank's total assets stood at NZ$31.1 billion, up nearly NZ$5 billion year-on-year from NZ$26.4 billion due to the increased deposits placed with the bank from the government's burgeoning debt issuance. The New Zealand Debt Management Office issued NZ$19.5 billion worth of government bonds in the year to June 30.

Of the central bank's assets, NZ$24.6 billion worth was held in foreign currencies and NZ$6.4 billion worth in the New Zealand dollar.

The Reserve Bank reveals the impact the European sovereign debt crisis has had on its investment strategy. The central bank slashed its holdings of French government, and "near government" securities to just 14% of its holdings by country at June 30 from 37% a year earlier. "Near government" securities are the likes of bonds issued by government owned or guaranteed entities.

The Reserve Bank also slashed its US holdings to 23% from 40% as that country's economy remained weak and its Federal Reserve indulged in quantitative easing or money printing. Heading in the opposite way was the Reserve Bank's holdings of German government and near-government securities, which rose to 34% from just 10% a year earlier. It also shifted 5% of its exposure to each of the Netherlands and Austria where it had none a year earlier.

"The Bank has always held its European investments in the highest-quality sovereign entities, such as France and Germany, and not in the likes of the Republic of Ireland, Portugal or Greece," the Reserve Bank says.

The balance of its holdings by country at June 30 had 2% in an Asian bond fund, 10% in Japanese securities, 4% in Swedish, and 3% in supranational entities such as the World Bank and Asian Development Bank.

The central bank's holdings by currency also changed significantly over the year to June, with its euro holdings up to 36% from 25% and its US dollar holdings down to 52% from 64%. Its yen exposure rose to 10% from 8% and exposure to other currencies fell to 2% from 3%.

During the year to June the Reserve Bank's foreign reserves intervention capacity fell to NZ$9.1 billion from NZ$11.3 billion as it wound back increases made during the global financial crisis

Elsewhere in the annual report the Reserve Bank notes that it envisages adopting "most" of the measures in Basel III, the new international regulatory standards for banks.

The central bank has previously said of Basel III that it wants to ensure a "suitable fit" for New Zealand conditions and wants to coordinate its policy with the Australian Prudential Regulation Authority's.See more here.

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