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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 
--------------------------------------------- ---- 
 
 
WELLINGTON 00000336  002.2 OF 005 
 
 
¶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 
 
WELLINGTON 00000336  003.2 OF 005 
 
 
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. 
 
 
WELLINGTON 00000336  004.2 OF 005 
 
 
¶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. 
 
WELLINGTON 00000336  005.2 OF 005 
 
 
 
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