Hon Dr JONATHAN COLEMAN (Associate Minister of Finance)
on behalf of the
Minister of Finance
: I move,
That the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill be now read a second time. I want to begin by thanking the members of the Finance and Expenditure Committee for their prompt handling of the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill. The committee received six submissions and heard from four submitters.
The bill amends the Reserve Bank of New Zealand Act 1989 to establish a legislative framework for the issuance of covered bonds. This framework aims to provide legal certainty as to the treatment of cover pool assets in the event that an issuing bank was to be placed into statutory management or liquidation. The bill also enhances the Reserve Bank’s supervision of covered bond programmes.
This bill is important, as it will improve the access of New Zealand banks to offshore covered bond markets. Covered bonds have proven to be an important source of finance for New Zealand banks over recent years, when funding markets have been volatile. Banks have been able to issue covered bonds at a reasonable cost when it has been difficult to issue other forms of debt. Further, covered bonds provide New Zealand banks with a source of long-term funding, which is important to reduce the vulnerability of the New Zealand economy to sudden changes in investment sentiment. This helps to promote overall financial stability, and, as such, benefits all New Zealanders.
The committee has recommended some minor drafting changes to the bill, but I will highlight the more substantive changes now. These changes are largely in the nature of clarification. The main obligations imposed by the bill remain the same. The definition of “issuer” in the bill has been redrafted to make it clearer as to whom the bill applies. An issuer is a registered bank that issues, intends to issue, or guarantees covered bonds. The definition has been amended to cover the situation where a bank that is the issuer of a registered covered bond programme has its bank registration cancelled. Such an entity would continue to be treated as an issuer unless and until it transferred all the rights and obligations under the covered bond programme to another issuer.
The first step towards providing legal certainty is requiring the registration of covered bond programmes with the Reserve Bank. An issuer commits an offence if it issues covered bonds other than under a registered programme. The committee has widened the scope somewhat, by making it an offence for the issuer to permit the issue of a covered bond other than under a registered programme. This is to address the situation where the issuer is not issuing but is guaranteeing the covered bonds.
The bill gives the Reserve Bank the power when registering a programme to designate the covered bond programme to particular programme classes based on the assets in the cover pool. This power has been amended so that the designation can take into account assets that are yet to be transferred to the cover pool. In order to be registered, the programme must meet certain registration requirements. The committee has added an express registration requirement that the issuer maintain a register of the cover pool assets that are owned by the special purpose vehicle, or SPV. The issuer
must also have prescribed certain internal controls in the programme, to ensure that this register is accurate and that it is consistent with any asset class designation.
It is also a registration requirement that a cover pool monitor be appointed to the covered bond programme. Although the appointment will be under contract, the committee has made some clarifications to the bill to specify the respective duties of the issuer and the cover pool monitor. Firstly, the bill has been amended to clarify that the onus is on the issuer to ensure that reporting requirements in the bill are met. Secondly, the issuer is required to keep the register of cover pool assets up to date, and the contract must require the cover pool monitor to assess the issuer’s compliance with that requirement, as well as the issuer’s associated internal controls. Thirdly, the cover pool monitor is now required to assess compliance at a given point in time, rather than at any point in time, as the committee did not consider that the intention was to require continuous assessment. This does not change the frequency of the cover pool monitor’s reporting from the original requirement in the bill as introduced.
The bill also imposes ongoing requirements on issuers of covered bonds—in particular, reporting requirements. The committee has introduced a new provision to clarify that in the event of issuer default, the issuer’s obligations end and the special purpose vehicle is then required to provide the Reserve Bank with any information it requests regarding the covered bond programme. Once registered, the covered bond programme can be removed from the register only once certain conditions are met. An amendment has been made so that the Reserve Bank can remove a covered bond programme from the register if the security interest over the cover pool has been enforced, subject to the consent of the relevant bond trustee and security trustee.
The second step to providing legal certainty in respect of registered covered bond programmes is clarifying the application of the law in relation to the assets held by a covered bond special purpose vehicle in the event the issuer is placed into statutory management or liquidation. The bill as introduced did not address the statutory management regime in the Insurance (Prudential Supervision) Act 2010, so the committee has recommended an amendment to make it clear that a covered bond special purpose vehicle is not an associated person or subsidiary of an issuer for the purpose of the statutory management regime in that Act.
The bill includes a transition period that delays the application of the bill to existing covered bond programmes, to allow time for amendments to be made to the programmes to meet the registration requirements. The committee has recommended extending the transition period from 6 months to 9 months to take into account 60 working days allowed for the Reserve Bank to consider applications for registration.
I note that the committee discussed the appropriateness of the issuance limit for covered bonds that is currently imposed by the Reserve Bank. The limit set by the Reserve Bank by condition of registration limits the assets of the bank encumbered in favour of covered bond holders to 10 percent of the total assets of the bank. The committee considered that this limit provides an appropriate balance between the benefits of covered bonds in terms of reducing the risk of bank defaults in New Zealand, by improving the ability of New Zealand banks to source long-term funding against any risks to unsecured creditors in terms of covered bond holders having priority over cover pool assets in the unlikely event that the bank failed.
Once again, I would like to thank the committee members for the work that they have undertaken on this bill. It has been significantly enhanced through the committee process. This bill will improve the resilience of the New Zealand financial system to volatility in international markets. I commend this bill to the House.
Hon DAVID PARKER (Labour)
: I thank the Associate Minister of Finance for his contribution on the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill
and for that lucid description of what covered bonds are and why the Government deems them necessary. The Labour Party wishes that we did not need covered bonds in New Zealand but it is wishful thinking to say that we do not need them. We have them, and they are pretty hard to unwind at the moment, particularly in the face of a current account deficit that means that New Zealanders are reliant on increasing lines of credit coming through the mainly Australian-owned banks via overseas lenders to those banks. Some of this credit, these days, is through these covered bond vehicles. I will come back to the issue of why the necessity for this is made worse by New Zealand’s current economic setting, which may lead to a prolonged and entrenched current account deficit that is not going to be cured under current economic settings.
As the Associate Minister has fairly acknowledged, the effect of covered bonds is to create a class of lenders to banks who have a security over some of the assets of the bank, namely, some of the lending securities that the bank has. For example, if the bank borrows money—they might be borrowing it from an overseas bank, or from an overseas sovereign fund, or from some group of bondholders overseas—and the bank then lends that money to New Zealand borrowers, and it is a significant loan, generally the bank has a form of security that is either a mortgage or a debenture. The security that that bank has is available to be used in the event that the New Zealand borrower does not repay what the bank has advanced to them.
Until we had covered bonds in New Zealand all of those securities were available. In the event that a bank that had deposits from those overseas lenders as well as New Zealand depositors went belly up, everyone was ranked equally. If the bank went belly up because it had got into financial difficulty and made some unwise loans, then everyone stood in the same position. If there were not enough assets to go around when the bank went bung, everyone took a haircut, and everyone took the same haircut. What we are doing through this legislation is we are saying that there should be a class of lenders to banks who have a priority right to some of the assets of the banks. So some of those mortgages and debentures, rather than being available to all depositors, will effectually have a “gotcha” over them in respect of these international lenders who have lent through this covered bond market.
Until the global financial crisis there were no covered bonds in the New Zealand market. There have been covered bonds, particularly in Europe, for a long time. Indeed, in some of the European banks there are high levels of covered bonds, meaning that a lot of the lending is matched with a “gotcha” over the securities of the bank. This means that the pool of assets that is available to people who are not in those covered bonds but are effectively unsecured depositors in the bank is smaller. All other things being equal, if one of those banks goes belly up, then the covered bond holders are effectively protected from getting much of a haircut and the other depositors wear the adverse consequences of that. The consequences of insolvency are concentrated upon them and they suffer more of a loss—they take more of a haircut. That is the effect of covered bonds.
Dr David Clark: Some of us have more hair to lose than others.
Hon DAVID PARKER: Thank you, Dr Clark. The effect—
Hon Clayton Cosgrove: That’s unparliamentary.
Hon DAVID PARKER: No, that was a compliment to me and insult to him—at least, to those who are looking across at me rather than down from the top.
So the effect of covered bonds is to change that arrangement, and to change it dramatically. Following the global financial crisis, when banks were hard-pressed to renew some of their credit lines, the New Zealand banks found that they had to meet their obligation to repay some of their older borrowings and refinance them so that they
could lend money out to the people they had loaned to in the New Zealand market. In order to do that they had to enter into the covered bond market.
There has been a benefit to that in New Zealand, because if it did not happen, then it may have been the case—we will never know with certainty, but it may have been the case—that those banks would not have been able to meet their obligations to the people who had lent them money, either overseas or in New Zealand. Some of those banks could have been under pressure, and that would have led either to a failure of the bank or to an increase in New Zealand interest rates—both of which could have been problematic for New Zealand. So I have no criticism of the banks, actually, in the face of what happened there. They having expanded credit in the earlier years into New Zealand, I can see why they chose to pursue the covered bond market.
Nevertheless, there is something in the criticism from Emeritus Professor Geoff Bertram, formerly from Victoria University, an economist, and others who are severely critical of the New Zealand regulator allowing these covered bonds to arise. The fact that they were not used in New Zealand did not mean that they could not be, we found. Under the existing legislation it was possible for banks to issue covered bonds, because there was no prohibition against them. So they did, and then the Reserve Bank came along after it had happened and said: “Look, we’re going to impose a limit on that through their banking licence, or the conditions of their registration as a New Zealand bank.”
So, reluctantly, we have come to the view in the Labour Party that this is necessary. I would like to think it will not be necessary for ever, and that one day, when New Zealand is in a stronger economic position and our banks source even more of their funding from local sources, we can revisit this and give New Zealand depositors equal priority over all of the assets of the bank, rather than having part of those assets put out beyond their reach through the covered bond mechanism, but at the moment it is necessary.
I want to come to the question of the rate. There is a proposal that the limit be 10 percent of the bank’s assets at all times. The Australians have a rule where the limit is 8 percent of the bank’s assets as at the date of issuance. I personally would have preferred the Australian model. We have gone along with the Reserve Bank advice, but I do not see why we are getting different rules in New Zealand compared with Australia. It is just adding levels of complexity at a time when CER is meant to mean we have similar rules across both sides of the Tasman. It is unlikely that if you had 8 percent at the time of issuance, it would rise to more than 10 percent of the bank’s assets. For that to happen there would effectively have to be a 25 percent decrease in the size of the bank. If that is happening, well, there could be problems in that bank anyway. So I prefer the simplicity of the Australian model.
I understand the Reserve Bank has its own reasons for the 10 percent model, and we can go along with it because there is not a huge difference. Canada has a 4 percent limit, and we thought about whether that was an appropriate limit. But the advice that we had from officials was that that was too low a limit for New Zealand, because it meant that in respect of our smaller banking institutions the size of issuance that they could have into the covered bond market was so small that there would not be interest in the covered bond market. Internationally, they are rather large tranches of money, and 4 percent of some of our smaller banks like Kiwibank would mean that they were closed out of that market when their competitors—the big Australian banks—would be able to access that market. We do not want to create competitive disadvantage for smaller banks in New Zealand in respect of this, because I personally do not want to prefer the interests of the bigger banks over the smaller banks, and I am sure that is a view that might be held by others in this House, as well.
One issue where we do disagree quite strongly with the Government is that this limit should not be easily changed. We do not think this is something that should be delegated to the Reserve Bank and be within its discretion to change. We think the Reserve Bank should have to come to the Government, and say: “Hey, we think this should be changed.” There is a policy decision that then should be taken by the Government—not delegated now to the Reserve Bank—as to whether that should be the case. So we oppose discretion being given to the Reserve Bank to allow changes to that 10 percent level in the future without recourse to either the executive or Parliament. Indeed, you could argue that that sort of thing is so serious that it should come to Parliament. But we thought, well, at least there should be some executive responsibility for a decision such as that rather than delegation to the Reserve Bank.
I am just about out of time, so I am going to say one more thing. That is that the greatest problem that this exemplifies is our current account deficit. Our current account deficit is funded only one way every year. It is from more borrowing from overseas, most of it through the banking channel or asset sales to overseas owners. Every year we do that the balance sheet of our country continues to get worse. That problem was going to be cured by this Government; it was one of its promises. It said it was going to increase the percentage of exports as it rebalanced the economy towards the export economy. It has not done so. It has failed because it will not pull on levers like capital gains tax, addressing monetary policy, or compulsory universal KiwiSaver.
TODD McCLAY (National—Rotorua)
: It is a pleasure to speak on this bill, the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill, in its second reading. I want to thank members opposite and Mr Parker for the way that we were able to work constructively together on the Finance and Expenditure Committee on this legislation. Although for those who are listening—
Hon Simon Bridges: That’s not what David Bennett told me.
TODD McCLAY: No, I said David Bennett did not work constructively in the select committee; I did not say Mr Parker! Anyway, I will get back to this important issue.
Although for those who may be listening or will read about this in the newspaper it is not the most exciting piece of legislation, it is, none the less, quite important. It has the ability to have great effect upon banks, those who borrow from banks, and the cost of their borrowing to some degree. It sets up a legislative framework for the issuing of covered bonds. The covered bonds market in the world is worth some $2 trillion every year, which is a very large amount of money. Some would say it is the amount that New Zealand would come close to owing if we did not have a National Government and if the Labour Party was in charge. Thankfully, that is not the case.
The reason it is so important for us to have this legislation is because banks in New Zealand are already entering into covered bonds borrowing around the world, and they are doing so without the legislative framework to control the borrowing that they undertake. This also gives legal certainty to rights and responsibilities.
I think, from memory, there are four banks in New Zealand, as we heard at the select committee, that have borrowed covered bonds, and they have done so through contractual agreements or relationships. What that means is that, in so far as giving preference, should a bank fail, heaven forbid—I do not believe that will be the case with the larger banks in New Zealand—through their contracts the banks that have loaned the covered bonds to them will already have the ability to have the first chance to get a return on their loans.
So what this legislation really is doing is bringing this issue within the ambit of the law, creating a statute to control it, and in turn giving legal certainty to those that would lend to our banks under the covered bonds scheme. I think that brings us into line with
almost every other country in the world, including Australia, which put in place this legislation in 2010.
I think at the Committee of the whole House stage there will be an opportunity to go into some of the detail of the issues that Mr Parker raised. I very much look forward to that. But I want to pick him up on one point that he spoke of, which is around the percentage that banks in New Zealand could borrow under the covered bonds scheme that would be covered, compared with their assets. We did agree that it should be set at 10 percent. Indeed, already the Reserve Bank has ensured that it is 10 percent, and we have decided to put that in legislation.
The challenge with looking at our lower rate, which other countries may use, is that the assets of banks in New Zealand, compared with the assets of many overseas banks, are relatively less significant. Therefore, the ability of our banks to borrow from some of the more important covered bonds markets in Europe, America, and elsewhere would be limited. I understand that in Europe, as an example, some covered bonds lenders have limits as to the amount, and our banks would miss out.
So I think this is an important piece of legislation, and we will have a chance to talk about it much, much more. I want just to say at this stage to the submitters who came before the select committee that it was useful for both sides of the House to be able to delve into some of the detail of this bill to a greater degree. I am grateful to some of the experts, who had much more knowledge than we initially did before we started on this process. Thank you.
Hon CLAYTON COSGROVE (Labour)
: I think my colleague David Parker provided a good encapsulation of where we sit on this side of the House in respect of this bill, the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill. We will support it. We support the legislation but with some reservations, as Mr Parker outlined, in respect of the fact that this bill now does change the hierarchy of security from ordinary deposit holders having an even playing field and being treated equally to those lenders who are the holders of covered bonds having preference over those ordinary depositors.
But I want to just touch on a point that was made by, I think, Mr Hayes as Mr Parker resumed his seat. Mr Parker was providing the evidence provided by the IMF, the Reserve Bank of New Zealand, and the Minister of Finance’s own department, Treasury, which notes and projects that New Zealand at the moment, sorry, has the second-worst current account deficit in the world, beaten only by Greece. And the IMF, the Reserve Bank, and Treasury, of course, note that we are projected at some point in this period to take the gold medal—that is, to be No. 1 in the world, ahead of Greece—for having the worst current account deficit on the globe. There was an interjection, I note, by Mr Hayes, who said “Oh!” and something about Labour borrowing—you know, all we do is borrow. Well, could I remind that genius, “Dr Dolittle” over there, that at the peak of this Government’s borrowing—at the peak of this Government’s borrowing, Mr Hayes—$380 million was being borrowed, not per year, not per month, but every 7 days by those guys over here. That is 380 million bucks a week. That genius has the audacity to say to us that we are sort of borrow-and-hope merchants, when, of course, I note that our economic track record—sadly, Mr Hayes does not remember this, or has a convenient memory loss; maybe it is the bow tie or the flash haircut—when we left office—
Hon Member: At least he’s got hair.
Hon CLAYTON COSGROVE: —OK, I apologise; it is not a flash haircut—was 9 years of surpluses from our Government, and record low unemployment. Need I go on? Net Crown debt was zero. That was the legacy of our Government, which was bequeathed to Mr Hayes’ party, and then of course it, at its peak, is borrowing $380
million a week. That is a lot of bow ties and a lot of haircuts—that is a lot of bow ties and a lot of haircuts for “Dr Dolittle” over there, “Mr Magoo”.
But I want to come back to this bill, and I agree with Todd McClay. This is an important—[Interruption] I apologise. I may be in the process of agreeing with some of Mr McClay’s words and, therefore, destroying his career—that was the point. But this is an important piece of legislation. It is about securing banks. But I want to touch on the last points Mr Parker made. We disagree in terms of an acceleration of the 10 percent limit that this should be delegated to the Reserve Bank. In the select committee report, on page 7, for Mr Hayes’ benefit—there is only one paragraph on there, in case he is confused—it says that “The majority of [the committee], however, considered that the current arrangement provides an important element of flexibility, which would prove advantageous in any financial crisis, when rapid responses to market developments are likely to be needed.” It is true that in a financial crisis rapid responses are required. It is a bit like when we in Government, after the Australians rang us up and said that they were having a retail deposit guarantee scheme, had to move immediately to ensure that there was no trans-Tasman slippage in terms of depositors’ funds.
But I would just simply argue this: where is the problem with a lack of flexibility in having the Government of the day make that decision? What it requires is a high price. It requires some efficient analysis and decision-making, some rapid decision-making, which still provides any level of flexibility one would want, but it actually requires the Government to take responsibility for that analysis and for its decision making, unlike when these guys got in, when, in terms of the Retail Deposit Guarantee Scheme, the Minister of Finance, the Governor of the Reserve Bank, and Treasury did not talk to one another. We got gamed to the tune of hundreds of millions of dollars, which we should have inquired into, had it not been for Mr McClay, Mr Bennett, “Dr Dolittle”, and a couple of others on the Finance and Expenditure Committee who blocked our request for an inquiry into that. And it was Mr Hayes, of course—it was Mr Hayes, of course—who coined that interesting phrase when, I think, Dr Clark was raising the issue. Hundreds of millions of dollars got gamed out of the pockets of taxpayers because the finance Minister did not have his eye on the ball, and Mr Hayes’ response in the committee—and I invite him to deny it—was to say “Small change.” That is small change. Hundreds of millions of dollars that we know of, or it could be $500 million or it could be $800 million, and Mr Hayes’ greatest contribution to the body politic was to describe that to taxpayers as “Small change.” Well, there endeth the lesson in respect of Mr Hayes—game over. That is what he thinks, as a custodian in Government of the taxpayers’ purse.
So we would argue that the decision to alter the limit and the scheme of arrangement around it should be one taken directly by the Government of the day. It is, after all, a major policy decision. It does not reduce flexibility at all in terms of the process, but instead of sort of bumping responsibility to the Governor of the Reserve Bank so that this crowd could wash their hands of it and say: “It wasn’t us. Don’t blame us. The governor’s independent. He can do it.”, they should actually up the ante, take our suggestion on board, and ensure that it is a policy decision where the Government of the day bites the bullet and makes the call. After all, that is why these geniuses are paid sort of quarter of a million bucks a year, have a ministerial car and a house, and all the sort of—
Andrew Williams: Which geniuses?
Hon CLAYTON COSGROVE: The ones across the aisle, Minister Bridges being the newest of them. I am sure his backside is enjoying sitting on the grey leather in the BMW, and the bank account has swelled, I am sure. But the problem is that Mr Bridges
should stand up and say that as a Cabinet Minister he is prepared with other colleagues to take this critical policy decision. As Mr Parker outlined—
Andrew Williams: He’s building bridges.
Hon CLAYTON COSGROVE: Building bridges, indeed. He has given up clamping for Lent, I am told. That was his last portfolio—“clamping” was the word I was using.
So where we are at is a 10 percent limit, which is higher, of course, than Australia’s at 8 percent, and, of course, Canada’s, as Mr Parker pointed out, at 4 percent. And as we go through this bill in the Committee stage it would be helpful if the Minister would tell us as to why he feels he has got to kick the can down the road towards the Reserve Bank house and delegate the decision to the Reserve Bank. It is a major policy decision and that is why those guys over there get paid the big bucks.
It is a concern, as I say, that we will be moving from a situation of an even playing field for ordinary depositors; now we will be changing that hierarchy to give preference to those who have the facility of covered bonds. That is a concern. But we acknowledge that, on balance, this is appropriate legislation, bearing in mind the points we have made. And we would encourage, as I say, the Government as we facilitate the passage of this legislation to outline issues in respect of decision making.
But I conclude where I began by noting that this Government in terms of current account deficit—you know, Bill English will have an achievement this year. We will be No. 1 worst in respect of our current account. In the Western World, that will be a historic achievement, and it is laid at his feet directly because he refuses to take the advice of the IMF, the Reserve Bank, and Treasury. He knows something, apparently, that everybody else, including his own department, does not. They say the current account deficit is heading for the rocks. Mr English says the IMF, the Reserve Bank, and Treasury are wrong and he is right, but he has no evidence to back up—no evidence to back up—those assertions. He refuses to consider any other measure, because he is philosophically opposed to a capital gains tax, superannuation measures, and other measures that we have put forward and that manufacturers and others have put forward. His view, like the Government, is to do nothing: cannot do anything, will not do anything. They are out of ideas: “The market will sort it. Hands off. We will just take our money and run. We will just take our pay and abrogate our responsibilities.”
Dr RUSSEL NORMAN (Co-Leader—Green)
: I stand on behalf of the Green Party to speak to the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill. What this bill does in a nutshell is facilitate and regulate the ability of the New Zealand banks to borrow from overseas. That is the essence of the bill. And that should be a worry. For people who are concerned about the increasing indebtedness of the New Zealand economy as a whole, what this bill is a reflection of is that the New Zealand banks are having to go further overseas in order to borrow more money to fund our current account deficit.
But before I get on to the general problem around the current account deficit, I wanted to start with some of the specific concerns why depositors in banks should be interested in this bill. If you have a deposit in a New Zealand bank, the reason you should be interested in this bill is that it means that if the bank goes belly up, other people will get access to the bank’s assets before you. That is what a covered bond means. When the banks want to borrow from overseas, what they will be doing is going to overseas lenders and saying that they want to borrow some money. The lenders will say: “OK, we will lend you money, but what is the asset?”. What is the mortgage, if you like, against which they will lend the bank money? What the New Zealand bank will do is put up an asset or some of its assets, which are basically going to be housing loans, and say: “Look, we will borrow money off you, and if we go belly up you get this
asset.” What that means, however, is that if the bank goes belly up the New Zealand depositors are not first in the queue to access those assets. That is fundamentally what a covered bond means. It gives priority in the queue of creditors to whomever loaned the money to the bank for this covered bond. That means that the depositors are not first in the queue to access those assets if the bank goes bad. That is a significant development.
What we found out in the course of the Finance and Expenditure Committee inquiry is that this is already happening. Speaking for myself, I was unaware of it. The covered bond market is already developing in New Zealand. The banks are already engaged in this practice. So in some respects we are regulating a practice that has already started.
We are going to be supporting the bill because we think it is essential that we do. But I think it is important to understand what is happening here. We are so far down the debt track as a country—I am not talking about the fiscal position of the Government; I am talking about the country as a whole—that now we are advancing into these new ways of borrowing money from the rest of the world to fund our current account deficit. But that means that if the banks go belly up, depositors will not be first in the queue to access the bank’s assets. So it does put depositors’ money at risk as a result. Of course, it does facilitate the banks accessing this money, and so it does add some stability to the banking system in that respect, but there is a downside to it and we need to be aware of it. It is important that there is a limit on what proportion of the bank’s assets it can borrow through the covered bond market, because whatever that proportion is—and it is set at 10 percent currently by the Reserve Bank—that is the proportion of the bank’s assets that depositors will not have access to if the bank goes belly up and we try to fix it.
I think the bigger policy issue that sits behind this bill, of course, is the problem of the current account deficit. The reason why the banks are continually going to the international market to borrow more and more money is that we are running a large current account deficit. Over the last decade, basically, the banks have been borrowing money overseas and shuffling it through to the private housing market. Aside from the credit the New Zealand banks have created themselves, they have also been borrowing from overseas, and they have been passing that through into the housing market. We have seen a dramatic expansion in the housing market in New Zealand fuelled by this cheap credit. The price of housing in New Zealand doubled between 2002 and 2007 and that housing market inflation is one of our problems. It is one of the reasons we are borrowing all this money, and it is also part of the bigger picture of why we continue to have a current account deficit.
The current account deficit is predicted to increase to 6.5 percent of GDP by 2017 according to Treasury. That is a very large and very unsustainable current account deficit. So if we do not have the policies in place to address that current account deficit, we will need not just the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill; we are going to need a whole stack of measures to borrow more and more and more money from the rest of the world to fund our current account deficit as a country. The Government seems pretty happy about that. Originally, when it first got into office, it was not happy about that. It said we had to rebalance the economy. There are many metrics for rebalancing the economy but probably the single key metric is the current account deficit. So initially Bill English, quite rightly, said we need to deal with this problem. Of course, since he has been in Government the problem has only got worse, because the current account deficit continues to grow. It went very high during the Labour Government, and that was a huge problem. Then it dropped dramatically during the global financial crisis, and now it is steadily rising again.
As we undermine the export and tradable sector with our very high currency, which the Government insists it must do nothing about, that very high currency is creating
tremendous problems for our exporters and manufacturers, and that means that our current account deficit is going to get worse. If we cannot trade our way out because our currency is overvalued—the IMF says the currency is overvalued by 15 percent; it is probably more than that by now—then our current account deficit will only get worse. The high New Zealand dollar also means that imports are cheap, so we buy lots of imports. It also means that businesses in New Zealand that are competing with imports are being driven out of business. As we knock out these businesses that are fundamental to our tradable sector we are making our current account deficit worse, and that means that we have to borrow more and more money from the rest of the world or sell assets to the rest of the world. There are only two ways to fund a current account deficit—short of quantitative easing, there are only two ways—and they are by borrowing from the world, which this bill facilitates, or by selling assets, whether it is the Crafar farms or whether it is the one the Canadians recently bought. You can sell your land.
Essentially, when the Government says it is happy with its current policy settings, what it means is that it is happy selling more and more land and assets into overseas ownership to fund the current account deficit. What the Government is saying is that it is happy with a situation where we are borrowing more and more from the rest of the world in order to fund the current account deficit. The problem with the Government’s strategy in that respect is that once you borrow the money you have to not only pay back the original, the money that you borrowed, but also service the loan, the interest payments, which adds yet more burden on the export sector, which is the one that has to pay this interest. Once you sell all these assets, the profits that come out of the assets, whether they are the farms or other kinds of assets, go overseas to the owners, because that is why they bought those assets. The foreign owners were interested in buying those assets in order to access the profits that come from them. Those profits then travel overseas and add to your current account deficit. So it becomes an ever more difficult problem to solve, the longer you run a large current account deficit. The problem for New Zealand is that we are going further and further down that track.
We have this bill in front of us, which at one level is a rational response to the situation we are in. We are trying to facilitate and regulate borrowing more money from overseas via the banking system through covered bonds. It is a rational response to the immediate situation we are in. The Greens will support it for that reason. It is not a rational, long-term solution to the challenges facing the New Zealand economy. So the Government might get this bill through, or whatever, and say: “Oh well, we will carry on. People can still afford cheap flat-screen TVs.”, but the way that we are affording cheap flat-screen TVs is we are borrowing the money, and we are selling our assets to the rest of the world. I tell you that is not a sustainable strategy. That is why the Greens have been pushing unorthodox—in New Zealand—policies such as lowering the official cash rate, and using loan-to-valuation ratios to control housing inflation so we can have a lower official cash rate to put downward pressure on the exchange rate, and unorthodox policies like quantitative easing in order to pay for the Christchurch rebuild, because we think it is critical that we deal with the problem of the current account deficit. Anyone who wants to have a glib debate about printing money or all the rest of it—which is all we have really got from the Government or Shamubeel Eaqub, who is the Government’s favourite economist—those people who want to have that glib debate are not dealing with the real, fundamental challenges that are facing us. If we do not deal with the current account deficit we have no choice but to borrow more money. We have no choice but to sell further assets. A Government that does not want to deal with that problem is a Government that is not working in the long-term interests of New Zealand.
We will support this bill because it gets us through where we are now, but let us be absolutely clear: we need solutions to the problems we face.
JOHN HAYES (National—Wairarapa)
: While Labour, the Greens, and New Zealand First are trying to talk our economy down, and promoting money printing and more taxes, the National-led Government is getting on with the job of responsibly managing the country’s finances and helping build a more competitive and productive economy. The last Labour Opposition speaker—that little fellow with the huge ego and no hair, who got thrown out of his electorate at the last election and is still sitting here on the list—has not worked out that this economy grew at 2 percent in the past year, which puts it in the top 10 percent of the OECD.
Interest rates are low. A family with a $200,000 mortgage is now saving about $200 a week in interest. Our public finances are improving so we can return to surplus and get on top of debt. Look at this chart here: this is how we are getting on track with Government spending and returning to surplus. The policies proposed by our opponents, including printing money, increase the supply of money, and increasing it will only increase inflation. That means that interest rates will go up, so your mortgage costs will go up, and so your business costs will go up. This will reduce real wages. It will cut jobs. It means that, on top of everything else you buy, the price of petrol would go up.
Here are a couple of views of commentators. Since the last speaker mentioned Shamubeel Eaqub, he rubbished the idea, saying “printing money is a policy of last resort, and it would not necessarily stop manufacturing and jobs going offshore. It might be free money in the short term, but in the long term it would lead to higher inflation.” That reduces the standard of living for most people and the impact tends to be much greater on low-income households rather than higher-income households. The Employers and Manufacturers Association Chief Executive, Kim Campbell, says “fiddling with the currency is no quick fix.” If one thinks there is a magical printing press in the sky that solves all our problems, there is nothing further from the truth and it is extremely dangerous thinking.