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Tuesday, October 14, 2008

Credit Rating

I have always said a credit rating downgrade for the nation - for Crown debt - would have an immediate and negative effect on the perspective in which our foreign creditors view us, and that a consequent rapid depreciation of the currency - Icelandic in magnitude - would follow. I heard Rod Oram on the radio just a few minutes ago mention this briefly. By suddenly announcing that the government will "back the banks" does that strengthen the Crown financial position?

At what interest rate can our Aussie-owned banks roll over those gigantic NZD Uridashi and Euro bonds that are backed by the nation's mortgage-payers? As Laurence Olivier's character kept repeating as he plucked away at Dustin Hoffman's tooth nerves in Marathon Man our creditors will be asking "Is it safe?" Maybe Cullen's deposit guarantee sop is just so much clove oil on some pain that hasn't even happened yet. He can hear the clattering of monetary metal as the financial instruments are emptied onto the table, the international light has been beamed straight into his eyes, but the drilling hasn't begun yet... *gulp*

After weeks of disagreement over the need for a unified response to the financial crisis, major European leaders agreed on a coordinated plan that would inject public money into troubled banks and temporarily guarantee bank debt in an effort to get credit flowing again. In addition, European countries agreed to relax so-called mark-to-market accounting rules that require banks to price assets to current market prices. Australia and New Zealand also joined the fray and announced that they were guaranteeing all bank deposits. "With the newly decisive moves, other major nations are catching up to or surpassing the United States in sculpting a response to the crisis," declares the Washington Post. USA Today notes that the European announcement "may increase pressure on the United States to take further actions to bolster its major banks."
- Slate.com, in this morning's inbox.

That's probably the public perception in NZ. Helen said all our money is safe at the Labour Party launch... and therefore it is... because the government is safe. It's all about trust.

If they extend the Crown guarantee beyond the depositors in the 18 registered banks and the credit unions/building society sector then they have some explaining to do. Guaranteeing deposits into a Hanover-type "finance house" would be contrary to all the experience and policy of the last 30 years. Removing risk !? - on risky investments? Then who would bother investing in government bonds at lower yields when you can get the same guarantee at a private outfit with a better earn. Your original capital is not at stake.

There was a reason for not backing private banks. That reason - and it's countermanding in the US - is part of the reason why we got into this mess in the first place: The Freddie/Fannie Mickey Mouse mortgage companies were tacitly backed by the Fed and the US Treasury and they over-extended and the market called the government's bluff and the rest is history.

I'm even agreeing with Farrar:
This scheme provides a guarantee of $150 billion for deposts - the largest contingent liability in history. It is being done without parliamentary sanction and by a Government in the period just before an election. Traditionally in this period major decisions are not made unilaterally, let alone one of this magnitude.

Since Dr Cullen has been waving the Crown cheque book around could he have been bolder? Or maybe smarter?

He could have announced that the government was prepared to stand behind any registered bank by a Treasury-managed investment of up to 25% of it's total shareholding in non-voting preference shares to be bought back in two years or converted to voting shares. The Nat's would scream it's back-door nationalisation - which would actually play really well to many voters who have been given ample evidence that private banks have run amok and caused a recession. Winston would say this could slot perfectly in with his idea of a KiwiFund - and those holdings could end up with the NZ Super Fund or another Crown-owned vehicle at some later date. And the Treasury would probably advise that in an upswing the Crown could make out well on the deal should a future government decide to sell the stake.

But let's be practical - that scheme involves issuing treasury debt so an amorphous contingent liability of a deposit guarantee was a smart move. No money down. It sounded emphatic and strong and telegraphed action. Action today. Incumbency advantage played. The scheme is unlikely, most unlikely, to be drawn upon - they have it as a "?" in the books so it doesn't really count - pocket a 0.1% fee for the big banks on everything over $5billion and the position is net positive for the Crown. In uncertain times it is all about peace of mind and reassurance... trust.

As for the stockmarkets, supposedly good barometers of humanity, 15-25% down for last week in most countries and now the US has come back 11% today. Erratic and wild fluctuations. Why? Nobody knows what the fuck is going on. Are we going into a depression and deflation or are we at the bottom a recession with surging inflation?

US price deflation:
The world is on the cusp of an inflation “turning point”, so the standard models are likely to go badly wrong. Recent research with better models suggests that the US inflation rate could become negative within the next 18 months.

No-one seems to know exactly how much confetti each financial institution is hiding in their gold leaf briefcase. The purging process has not quite ended.

What China thinks is important. The future of Western capitalism depends on Communist China. Get to know these people, they are in charge now:

BEIJING, Oct. 12 (Xinhua) -- A high-profile meeting of the Communist Party of China (CPC) ended on Sunday by concluding that the overall situation of the country's economy was good and the dynamic of economic growth remained unchanged.

"The country's overall economic situation is good. The economy is growing quickly and the financial sector is operating steadily. The basic momentum of the country's economy remains unchanged," said a communique released at the close of the third Plenary Session of the 17th CPC Central Committee.

RBNZ FAQ's on the scheme:"

And just found it: RBNZ's hastily cobbled together New Zealand Deposit Guarantee Scheme

The Offer
Under the terms of the Public Finance Act, the Crown will invite eligible institutions to enter a guarantee of their deposit liabilities. Eligible financial institutions, will be New Zealand registered banks and non bank deposit-taking financial institutions, who are fully compliant with the requirements of their trust deeds. [!?]

The decision to enter a guarantee with any specific institution, whether now or in the future, will be at the sole discretion of the Crown.

Which deposits will be covered?
For New Zealand incorporated registered banks deposits from both residents or non-residents, will be covered.

For non bank deposit takers and for the unincorporated branches of overseas entities only deposits of New Zealand citizens and New Zealand tax residents will be covered.

Deposit liabilities will be covered regardless of the currency in which they are denominated.

Deposits and other liabilities owed to financial institutions, whether in NZ or offshore, are explicitly excluded from this guarantee.

How long will the guarantee last?
The guarantee will be offered for a term of two years.

The government will charge a fee for any guarantee offered on amounts in excess of $5 billion.

For covered liabilities in excess of $5 billion a fee of 10 basis points per anum will be charged for the guarantee. The fee will be charged on the basis of the total covered liabilities, in excess of $5 billion of the institution.

What will trigger the exercise of the guarantee?
The Crown will make payment in the event of the liquidation of a guaranteed financial institution, if its assets are shown to be insufficient to meet the liabilities covered by this guarantee.

These guarantees will be offered and administered by the Treasury.


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