By Bernard Hickey
This week the Government got back to work in earnest, borrowing a record NZ$950 million in one week, mostly from foreign banks and pension funds.
It's been like this for most working weeks for the last 2 years or so and is expected to be like this for another year or two. Usually the amount borrowed per week is around NZ$300 million, but strong demand from one foreign borrower was cited for the boost.
Buried amid all of the government's soothing talk about weaker growth and a slightly bigger deficit in the short term, was an announcement about a NZ$1 billion increase in government borrowing in the current financial year to NZ$13.5 billion.
That works out at NZ$270 million a week for 50 weeks of the year. Even in the last week before Christmas the New Zealand Debt Management Office (NZDMO), which is part of Treasury, announced it had sold NZ$250 million worth of 7 year and 10 year bonds with coupon rates (annual interest rates) of 6%.
Then this week it launched another sale of NZ$950 mln of bonds, again offering 5% and 6%.
Reserve Bank figures show that foreign holdings of these New Zealand government bonds have risen from NZ$14.4 billion to NZ$24.5 billion over the last two years and that foreign interests now hold about 65% of all government bonds held in private hands.
These weekly announcements of bond sales are, in effect, the sound of New Zealand sucking in foreign debt to pay for a structural budget deficit. The inevitable result of this sucking now is a blowing out of interest payments overseas in years to come, typically at a rate of 5-6% per annum for the next 10 to 20 years, just when we can least afford it as our baby boomers retire at great extra expense.
The government expects to issue NZ$59.5 billion worth of new bonds over the next five years. Given around two thirds of them (NZ$40 billion) are likely to be sold to foreign investors, that amounts to extra interest payments out of around NZ$2.4 billion a year for the next 10 years or so, which will add to our current account deficit.
It means we all have to work a little bit harder just to pay our way in the world, or, we have to borrow that much more to keep paying the bill.
This is all do-able while interest rates stay low.
What if they don't fall? What if New Zealand's credit rating is downgraded, as is now being considered by Standard and Poor's? A much safer and cheaper way for the government to borrow is from local small savers, rather than big foreign ones.
Why doesn't the government make a serious effort to borrow from Mums and Dads in New Zealand? Borrowing that NZ$40 billion locally would make our current account deficit much healthier over the long term.
It would also provide a much safer and higher returning investment option for Mum and Dad investors burnt badly by stock markets and finance companies in recent years. As it turns out, the NZDMO does already offer Mums and Dads the option of investing in 'Kiwibonds', but only for 6 month, 1 year and 2 year terms at interest rates of just 2.75%, 3% and 3.75% respectively. Meanwhile, the government is paying foreign savers 6% for 7 year and 10 year bonds.
The key problem for Mum and Dad investors and the government is the maturity of the borrowing.
The government wants the certainty of borrowing long term, but Mums and Dads tend to save for much shorter terms, around the 12 month mark. If only the two could be brought together the government could reduce our future current account deficits, reduce the future risk of losing sovereignty to foreign creditors and increase investment returns for local savers.
There is actually plenty of term deposits for the government to target if it was serious.
Reserve Bank figures show household deposits and PIE (Portfolio Investment Entities) in banks totalled NZ$100.8 billion at the end of November, up from NZ$92.3 billion two years earlier.
The growth of those savings by Mums and Dads in banks was almost exactly the same as the extra amount borrowed from foreign savers by the government over the same period. Mums and Dads typically were earning around 4.5% (before tax) on six month term deposits from banks over the last two years.
The government, meanwhile, was paying foreign savers around 5.5% on its borrowing. Surely local savers could be put together with the biggest local borrower (the government) to cut out the middlemen (the banks) and reduce our foreign debt risk?
It would require Mums and Dads to invest for longer terms and for the government to borrow for shorter terms and perhaps pay slightly more for it. This is a wider opportunity than for the central government.
Local governments will be borrowing heavily for infrastructure in the next decade and face the same problem.
Our governments need to get together with Mums and Dads to solve this problem and reduce the nation's future risks.
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