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Payback time alarm as $5 billion debt matures

By Neville Bennett

Friday 29th September 2000

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Anxiety is building in financial circles over how institutions will cope with the maturation of $5 billion in eurokiwi bonds over the next few months - including one major bond which was meant to mature this week.

Many billions of dollars of eurokiwi bonds were issued in the mid-1990s because foreigners were attracted to this country's high interest rates.

Eurokiwi is the generic name for bonds issued in New Zealand currency by foreign corporates and institutions. They are a major source of funds for local banks.

About $5 billion is due for settlement in the September and next four quarters.

Seven issues mature in September.

Most of the money went into the housing market through a complicated series of swaps, as banks backed loans for property.

Financiers thought, perhaps optimistically, in the mid-1990s that the money would be rolled over or extended at maturity.

But a rollover requires two willing partners and foreign players are holding off.

The chickens have come home to roost and the money will have to be found somehow - possibly through borrowing from Australia or elsewhere.

The National Business Review understands a $US500 million Fannie Mae (US superannuation scheme) bond matured on September 26 but the underwriters have made no announcement of a new issuance.

The key players are underwriters who are involved in listing bonds on European stockmarkets.

These are extremely conservative people who look very carefully at investment prospects.

First, they examine a country's credit rating, as well as ancillary data affecting overseas debt and current account deficit. New Zealand's ratings are not high in these areas.

Then they examine the trend in exchange rates as they are extremely adverse to taking exchange rates losses.

Interest rates are crucial. Again a rising or falling trend is significant but the most important factor is the "spread," or the difference between, say, New Zealand and European interest rates.

At present the spread is insufficient to raise much enthusiasm, especially as the dollar is unstable and debt level high.

The lack of appetite for New Zealand debt is a cause of anxiety.

At the very least, it implies local institutions will have to pay a premium in higher interest rates to gain funds.

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