KCDC gambles and loses on speculative interest rate swaps
Kāpiti Coast mayoral candidate Gwynn Compton says that Kāpiti Coast District Council has gambled and lost with an $8 million drop in the value of its speculative interest rate swaps as detailed in the 2018/19 Annual Report, taking the net unrealised loss on interest rate swaps to approximately $18.5 million over the past five years, and seeing Kāpiti paying higher interest rates than are necessary on the district's huge debt.
The loss highlights how unsustainably high debt has driven the Council to use speculative financial instruments that could potentially see ratepayers on the hook for ongoing multi-million dollar losses. Council is also running the very significant risk of being locked into paying unnecessarily high interest rates that could cost ratepayers hundreds of thousands of dollars more each year, especially if interest rates continue to fall as has been suggested is likely with economic growth slowing.
“Interest rate swaps were sold to ratepayers as a non-speculative tool to reduce interest costs on Council’s high debt. Managed well by a suitably large organisation, such as central government or a multinational company, and in an increasing interest rate environment, they can do that. But the reality is they are speculative tools and they do carry significant risks, especially for small and highly indebted councils like KCDC,” says Mr Compton.
“What’s more, if talk of interest rates falling further pans out, as looks likely with the Reserve Bank trying to stimulate slowing economic growth, then this will only further exacerbate an already bad situation for KCDC’s interest rate swaps, with ratepayers being left to pick up a growing bill.”
Gwynn Compton says that Mayor K Gurunathan also needs to front up and explain himself to ratepayers about his position on Council speculating on financial markets, with the Mayor having been a staunch defender of interest rate swaps in the past, as well as the Council’s now abandoned scheme to borrow $30 million to gamble on the share market.
“When Mayor K Gurunathan was defending the Council’s nonsensical scheme to borrow $30 million to gamble on the share market, the Mayor also defended the Council’s practice of using interest rate swaps as not being speculative. The Mayor was forced to backpedal on the risky nature of borrowing $30 million for the investment fund following the Auditor-General’s intervention and community outcry, and now it looks like the Mayor has been caught out again over the true speculative nature of interest rate swaps.
“If I'm elected as Mayor, I’ll ensure Council takes a sensible and responsible approach to managing its finances. When we have nearly $10,000 worth of debt for every household in Kāpiti, we need to take a cautious and prudent approach to reducing it, rather than taking unnecessary and unaffordable risks as is currently the case.”