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Cablegate: Effect of Global Financial Crisis On New Zealand's

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DE RUEHWL #0336/01 2882110
ZNR UUUUU ZZH
R 142110Z OCT 08 ZDK
FM AMEMBASSY WELLINGTON
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UNCLAS SECTION 01 OF 05 WELLINGTON 000336

SENSITIVE
SIPDIS

STATE FOR EAP/ANP, EAP/EP AND EEB, STATE PASS TO USTR, PACOM FOR
J01E/J2/J233/J5/SJFHQ

E.O. 12958: N/A
TAGS: ECON ETRD EFIN APEC PGOV PREL NZ
SUBJECT: EFFECT OF GLOBAL FINANCIAL CRISIS ON NEW ZEALAND'S
ECONOMY

WELLINGTON 00000336 001.6 OF 005


1. (U) Summary: New Zealand is not totally immune to the global
credit crisis with the first visible signs being manifested in the
NZ$260 million loss (4.9 percent) in value of the country's
Superannuation Fund due in large part to its fifty percent exposure
to international equities market. The Reserve Bank of New Zealand
(RBNZ) continues to reassure the public that NZ's financial sector
remains sound while it prepares to explore new ways to underpin
banks and ensure sufficient liquidity in the financial system.
Prime Minister Helen Clark announced on October 12 that the GNZ
would provide an unprecedented safeguard scheme for an opt-in
guarantee plan that covers deposits for New Zealand-registered banks
and eligible non-bank depositors (including banking societies,
credit unions and finance companies) with the cost amounting to
NZ$150 billion. However, NZ banks are in the unique position of
having four of the top twenty banks worldwide with the highest
credit ratings operating in its domestic market (all Australian
owned). Although there are eighteen registered banks operating in
New Zealand, eighty-five percent of New Zealand's bank assets are
owned by these top four Australian banks. In the 2008/09 Global
Competitiveness Report published by the World Economic Forum
(Davos), New Zealand was assessed as the eighth most secure country
in terms of the strength of its investor protection. This ranking
has not prevented the New Zealand business community from proposing
changes in both fiscal and monetary policy which they hope will
prevent the country from being buffeted by the global financial
crisis. End Summary.

First Signs of Trouble
----------------------

2. (U) New Zealand's first visible sign that the turmoil in the
world's financial markets has had any negative impact domestically
came with the announcement in the 2008 annual report (ending June)
for NZ's Superannuation Fund. The Fund is reporting a loss of
NZ$260 million or negative return of 4.9 percent. The Fund was
created to partially provide for the future costs of funding NZ's
pension scheme for public servants. The Fund began investing in
2003 with an initial deposit of NZ$2.4 billion of Crown money. As
of August, the Fund's assets totaled NZ$4.5 billion. About half of
the Fund is invested in international shares and a quarter invested
in fixed interest investments with the remainder invested in NZ
shares, property and commodities. Fund returns on NZ shares fell by
22 percent and the world shares fell 12 percent (at time of report).
The Fund's manager, Alan Langford, said there were no plans at this
time to decrease the NZ$3.6 billion Fund's exposure to the equity
markets. Payouts to recipients are fixed by law and to date will
not be affected by loss. The Fund's managers remain optimistic that
their investment strategy will weather the storm.

Reserve Banks Reassures Public
------------------------------

3. (U) The Reserve Bank of New Zealand (RBNZ) issued its October
report saying that the NZ financial sector remained sound. RBNZ
Governor Alan Bollard said in a press statement that "although the
domestic situation may have been exacerbated by the recent failure
of many domestic finance companies (non-bank building and loans
organizations) - withdrawn money (from the finance companies) has
flowed back into (regulated) banks as deposits." Bollard further
said, "We believe the NZ banking system remains robust and the RBNZ
was in ongoing dialogue with banks and monitoring their positions
closely." Bollard did say that although disruptions in the U.S.
markets were reverberating around the world, New Zealand banks are
not directly involved. Bollard said that while New Zealand will
inevitably feel some effects of the major global financial shocks,
New Zealand banks are not involved in the sort of complex financial
transactions that have caused significant losses in many of the
large global institutions. ConGen Auckland's banking contacts
confirmed that, compared to U.S. banks, NZ banks are "old
fashioned." Fifty percent or more of the assets on the balance
sheets of NZ's big banks are mortgages, a significantly higher
percentage than in the U.S. Furthermore, NZ mortgage lending is
conservative, with the sort of sub-prime lending seen in the U.S.
nearly unheard of in NZ.

RBNZ Measures to Secure Domestic Banks' Liquidity
--------------------------------------------- ----


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4. (U) The RBNZ will release soon a consultation document on a
proposed policy revision for domestic banks in regards to the
management of their own liquidity and funding. The proposed policy
changes are aimed at ensuring that the banks are less vulnerable to
future liquidity shocks and disruptions in global financial markets.
"While these measures will assist in promoting a more stable
liquidity situation, the Reserve Bank maintains its full confidence
in the (current) underlying solvency of the New Zealand banking
system," announced Deputy RBNZ Governor Grant Spencer.

5. (U) The Reserve Bank intends to make certain Asset Backed
Securities ("ABS "- e.g., home equity loans, auto loans and credit
card payments) eligible as collateral in its domestic liquidity
facilitation. RBNZ will also, if required, be prepared to lend on
the basis of fully-secured Residential Mortgage-Backed Securities
(RMBSs), prior to those securities achieving formal ratings" said
Bollard. He believes there has been good progress by financial
institutions in developing RMBSs should they be needed and went on
to say, "while we believe these measures are sufficient at this
stage, the Bank retains a number of other regulatory powers - we are
committed to ensuring the ongoing health of the financial system and
remain ready to respond as appropriate." The proposed terms for
this plan will be subject to industry consultation before they are
finalized according to the Deputy Governor. One Auckland banker, a
representative of one of the big four banks, reports that his
institution will be ready within days to sell off to the RBNZ a
significant block of RMBSs.

FM Cullen on the Global Credit Crisis
-------------------------------------

6. (U) Finance Minister Cullen reacted to the global credit crisis,
saying there were still real risks of serious harm to the New
Zealand economy but noted that the Australian-owned banks operating
in NZ (which comprise the greatest market share of NZ financial
institutions) had little exposure to the United States sub-prime
mortgage crisis. Cullen said that four of the top 20 banks
worldwide with the highest credit ratings were Australian owned and
that included the Bank of New Zealand (Australian parent), ASB,
ANZ-National and Westpac. (Note: There are 18 registered banks
operating in New Zealand but 85 percent of New Zealand's bank assets
are owned by the top four Australian banks listed above. End note).
He echoed Bollard's comments in noting that the earlier collapse of
several NZ finance companies had driven New Zealanders to shift
deposits to sounder banks, sending household deposits soaring by
NZ$10 billion over the past year to nearly NZ$85 billion. Cullen
said he believed that both New Zealand and Australia's banking
systems were sound and would emerge from the crisis in better shape
than many others around the world.

Prime Minister Guarantees Bank Deposits
---------------------------------------

7. (U) But fearing that the spreading global financial crisis may
directly affect the domestic financial market, Prime Minister Helen
Clark announced Sunday, October 12 an unprecedented safeguard scheme
for an opt-in deposit guarantee plan that covers deposits for New
Zealand-registered banks and eligible non-bank deposit-takers
(including banking societies, credit unions and finance companies).
"The purpose of the scheme is to assure New Zealand depositors that
they can be assured their deposits are quite safe and the New
Zealand financial system is sound," said PM Clark. The GNZ 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. It is estimated
that the cost of the scheme to the GNZ will add about NZ$150 billion
as a contingent liability but the GNZ is adamant that NZ banks are
sound, so there is no danger that it will have to pay out.

Details of the Deposit Guarantee
--------------------------------

8. (U) Under the terms of the Public Finance Act, the GNZ will
invite eligible institutions to offer a guarantee of their deposit
liabilities. Eligible financial institutions must be New Zealand
registered banks and non-bank deposit-taking financial institutions,
who are fully compliant with the requirements of their trust deeds.
For New Zealand incorporated registered banks deposits from both

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residents and 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. The
guarantee will be offered for a term of two years. The scheme will
be free for institutions with total retail deposits under NZ$5
billion. A fee of ten basis points per annum will be charged on
total deposits above NZ$5 billion. This means that a bank with
NZ$20 billion in retail deposits would pay NZ$15 million in fees per
annum. While there is no direct fee for individuals charged by the
GNZ, financial institutions will determine if and how the costs of
the scheme are to be passed on. The scheme does not apply
retrospectively and therefore offers no relief for those investors
who may have suffered losses prior to the announcement.

Reaction
--------

9. (U) After the Prime Minister's announcement, the four largest
big trading banks, ANZ-National, BNZ, ASB and Westpac, joined TSB,
SBS Bank and government-owned Kiwibank in confirming their
commitment to the scheme .but the blanket guarantee is already
drawing criticism. There are concerns it will, in effect, encourage
a shift in savings away from banks to non-bank finance companies,
whose offers of higher returns on riskier investments might be
harder to resist if they came with a government safety net. This
concern is driven in large part by the fact that more than 20
non-bank finance companies in New Zealand have failed over the past
two years with around NZ$5 billion of investors' funds that have
been frozen or negotiated to drip feed money owed to them. Of the
gigantic sum not yet paid back, a large chunk between NZ$320 and
NZ$785 million looks to be lost for good, based on estimates
provided by receivers and those companies that received the go-ahead
to carry on trading. (Note: The losses brought about by the
collapse of these NZ finance companies is not directly tied to the
sub-prime mortgage market in the U.S. ,but as credit became tighter
internationally the structural problems faced by these institutions
were exacerbated. End Note.)

Independent Assessment of NZ Banks' Viability
---------------------------------------------

10. (U) In section eight of the 2008/09 Global Competitiveness
Report published by the World Economic Forum (Davos), there is a
survey of the level of financial market sophistication of 134
countries. The report attempts to capture the opinion of business
leaders throughout the world concerning the many economic factors
that impact the environment in which businesses operate which in
turn dictates the competitiveness of a nation's economy. In section
8.07 of the report dedicated to the soundness of banks in the
respective countries and graded on a scale of 1 (insolvent) to 7
(healthy with sound balance sheets), New Zealand scored 6.6.
Rank-ordered Canada was listed first with a score of 6.8, New
Zealand ranked 8 scoring 6.6 and the United States ranked 40 with a
score of 6.1. In section 8.06 of the report, which ranks countries
by strength of investor protection on a scale of zero (worse) to ten
(best), New Zealand was in first place with a score of 9.7 and the
United States ranked 5 with a score of 8.3.

Reaction to Tighter International Credit Markets
--------------------------------------------- ---

11. (SBU) A senior officer of a multinational investment bank
located in Auckland said to the Consul General that New Zealand
banks depend on the international capital markets for as much as
half of their funding. According to media reports, local banks are
on the hook to repay NZ$60 billion (US$36 billion) to international
creditors within the next 40 days, debt that in the past they could
have rolled over. The banks will count on the kind of RBNZ help
described above to help them meet these obligations. Banks will
also turn to cost cutting, said the executive. ANZ Bank - New
Zealand has already announced a hiring freeze, a review of its
branch structure with a view to reducing staff, and an offer of
voluntary redundancies.


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12. (SBU) At the same time that bank liquidity is tightening, bank
customers are asking more of their banks. An officer of one of NZ's
big banks told the CG that because the commercial paper market has
frozen, customers that traditionally took care of their own
short-term cash needs are now coming to him for help. With global
money markets frozen and local demand for short-term credit
increasing, this banker reports that his institution is no longer
seeking new business, but focusing its limited resources on serving
its current customers. His customers complain that tight credit is
starting to ripple through supply relationships. Many suppliers,
even ones with long-standing customers to whom they traditionally
extended generous terms are reducing the period they are willing to
sell on an account. Some are even demanding cash on delivery not
just from new clients, but from customers they've had profitable
relationships with for years.

13. (SBU) New Zealanders' confidence in their banks is still high,
but there are signs that depositors are getting edgy. CG's' bank
contacts passed on reports that Kiwibank has seen an uptick in
deposits in recent days and has concluded the money is coming from
customers seeking the reassurance of that implicit guarantee. One
banker pointed to the reaction to a September 30 computer glitch at
one of the other big four banks as a sign of how jittery customers
have become. The glitch delayed transfer of funds to big customers
just as they were trying to make monthly payroll. Such incidents
have happened in the past at many banks, the banker said, and have
generated nothing more than frustration and embarrassment. This
time, however, the banker received calls from that bank's customers
asking if the bank was going under.

NZ Business Leaders' Reaction to Credit Crisis
--------------------------------------------- -

14. (U) Earlier this month, a panel of experts consisting of
businessmen, academics and journalists gathered at a prominent
Wellington law firm Bell Gully for a symposium entitled
"Perspectives on the Economy" to discuss how the current global
financial crisis may impact the NZ economy. Stephen Toplis, chief
economist at the Bank of New Zealand, opined that while most experts
are still unsure what direct long-term impacts the global credit
crisis will have on NZ's financial markets, the near-term damage
should be relatively minimal. Toplis said that while NZ's exposure
to the U.S. derivatives and sub-prime mortgage markets was
negligible, NZ banks do remain overleveraged and exposed because of
imbalances in NZ's domestic housing market. Several analysts noted
that one of the biggest potential problems facing the NZ economy was
its vulnerability as a single/limited commodity exports (dairy, meat
and agriculture) driven economy. Without a more diversified economy
NZ will remain precariously overexposed to downturns in demand in
the global markets.

Think Tank Offers Strategy to Protect NZ Economy
--------------------------------------------- ---

15. (U) In a draft report, released October 10, David Skilling CEO
of the New Zealand Institute and Mark Weldon CEO of the New Zealand
Stock Exchange (NZX) said the current global financial crisis is one
of the most serious events the New Zealand economy has faced in
decades and New Zealand's response to the crisis needed to be
"deliberate, serious and proportionate" calling for immediate,
bipartisan action as needed to ensure that New Zealand not only
survives the crisis, but thrives under the emerging economic storm
conditions." Skilling and Weldon further said, "We believe there is
little we can do about Northern Hemisphere banks, there is a lot we
can do to determine how well the New Zealand economy copes with
permanent changes to global credit markets and a global economic
slowdown." The report suggested some economic measure which could
reduce NZ's economic vulnerability including: provisional tax
payments (provisional tax is a way of paying income tax throughout
the year) be deferred for 24 months, capital investment be
"prioritized with incentives," a two-year income cap tax at 20
percent for New Zealanders returning home, firms be attracted to New
Zealand with two years of no corporate tax and the Research and
Development tax credit be retained. In the longer term, the report
said a company should be created to manage commercial state-owned
enterprises (SOE), a taxpayer savings vehicle should be created to
manage financial assets, KiwiSaver be made compulsory and the biases
in the tax code that promote housing speculation be removed.

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Comment
-------

16. (SBU) Prime Minister Helen Clark's dramatic move over the
weekend to insure bank deposits (a move that mirrored the Australian
Government) was a dramatic signal at the kick-off of her re-election
campaign to reassure the country's voters that her government (along
with the Reserve Bank) was prepared to take all necessary measures
to ensure the safety of the NZ financial system. While our contacts
in government, business and academia remain concerned about the
long-range impact of the international financial crisis on New
Zealand's economy, they believe the crisis will be mitigated because
the domestic banking system is conservative and the RBNZ is in the
right position to respond effectively. The typical New Zealander's
primary investment tends to be their house, rather than shares, so
gyrations on the international stock markets are not as unnerving
for Kiwis as they are for Americans. Also, the commodity sector
(dairy and agriculture), the engine of New Zealand exports, is
expected to remain strong even if prices do fall from recent
record-setting levels. These same contacts tend to view the
international financial situation not as a crisis for New Zealand in
itself but as a factor that will aggravate the current domestic
recession. Whether the recession will now be longer and more
painful than it otherwise would have been, Kiwis still believe the
NZ economy is better positioned than most to weather the storm. End
Comment.

MCCORMICK

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