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Kiwis splurge on cuckoos' eggs

Neville Bennett

Friday 21st November 2003

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The dollar's growth in value this year, relative to the US dollar, has been dramatic: from 39USc to 61USc. What does the future hold? It is unpredictable, as the price is the result of a complex interplay of market forces.

The known factors on the New Zealand side include the rate of economic growth, the spread of interest rates, the trade balance and the balance of payments. Similar factors sway the American side.

But an important force is that of foreign securities, issued in New Zealand currency. For convenience, they will be called eurokiwis.

Eurokiwis began to be issued in the 1980s. From none in 1984 it rose to $2.2 billion in 1985, $1.9 billion in 1986 and almost $4.0 billion in 1987.

The dollar became strong, spiking at 75USc in 1988.

Issuances then declined, through to $50 million in 1995. The dollar slipped to 52USc in 1992.

In 1996 interest rates were high and issuances rose again to $4.8 billion ­ close to a hundredfold increase.

In 1997 total issuances almost doubled again to $8.5 billion. In 1998 $7 billion were issued. The dollar rose to 73USc.

However, issuances fell off to $900 million and the dollar fell.

This close correlation between issuances and the strength of the dollar is to be expected. If foreigners buy $8 billion of New Zealand dollars in a year, the demand will drive the price up. In 1986 and 1997 it went to 73USc.

When the bonds mature, there is heavy selling of the dollar, as in 2000-2001 when it fell to 39USc.

In 2003, the cost of maturities will be $2.2 billion, and there will be a further $2.8 billion in 2004.

Huge maturities are also due in 2006 and 2007 ($3.6 billion).

Eurokiwis have made more capital available, and at a cheaper price, than New Zealanders could have raised for themselves. This has created a feeling of optimism, as interest rates were lower.

It encouraged ordinary Kiwis to spend rather than save. Indeed, the value of net assets has been pretty stationary since the mid-1990s.

Much spending on housing, cars, recreation and holidays was on credit, with serious consequences for the balance of payments.

The problem is fundamental. Being a bond issued in New Zealand, in New Zealand dollars, by a foreign party, for the purpose of being listed on a European stock market, it lies beyond the control of any New Zealand authority.

It is a cuckoo's egg laid in a New Zealand nest by non-caring parents. No consideration is given to New Zealand interests.

The issuers are as unconcerned about this as they are about the European investor to whom they have apportioned huge foreign exchange risks.

The bonds are issued when the issuer sees a nice opportunity to make a few dollars. This condition arises essentially when New Zealand interest rates are relatively higher than rates in Europe.

Bond issues cluster at certain times (see chart). Naturally, the maturities also cluster, particularly in the 2000-2001 and 2006-2007 periods.

The magnitude of these huge, sudden capital flows is destabilising and it requires big efforts to minimise the strains imposed on a small financial system.

For example, when issues were high, around 1996-7, the incoming capital lowered interest rates but drove the New Zealand dollar above 70USc.

Conversely, when there are large net maturities as in 1999-2000, involving some $5 billion a quarter, their broad effect was to deport capital, increase interest rates and depress the dollar.

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