Much under-reported by the New Zealand news media and certainly overlooked for its significance, the Reserve Bank of New Zealand announced on 29 October in a short press release that the US Federal Reserve's Federal Open Market Committee had approved a US$15 billion (NZ$26 billion) temporary reciprocal currency swap facility.
The currency swap will permit the provision of US dollar liquidity to New Zealand markets up to $15 billion through to 30 April 2009.
The currency swap, though modest by international standards, is similar to those used in the past month or two to ensure liquidity in the European Union, Japan, and elsewhere, where the Fed has essentially adopted a de facto international lender of last resort function.
When combined with evidence of tightening liquidity in New Zealand and the mis-management of the introduction of the recent introduced deposit guarantee system, the currency swap facility is no doubt an important lifeline for the Reserve Bank in its liquidity management in the months ahead.
Evidence is mounting of emerging liquidity problems. Expectations are that New Zealand trading banks which raise loan funds from issuing short-term commercial paper in London, a market that has effectively dried up in the short run, are very likely to have problems raising funds in the months ahead.
Reserve Bank data shows that $100 million of funds have been drawn down from the Reserve Bank's mortgage-backed securities liquidity facility recently. And the major trading banks have been quick to sign up for the government's deposit guarantee system.
Managed funds outside the deposit guarantee system are now experiencing a flight of funds to guaranteed deposits in other institutions, causing AXA New Zealand to freeze three of its mortgage-backed funds with $225 million under management.
Problems with the coverage of the Australian deposit guarantee system has seen Australian managed funds freeze more than A$24 billion in order to remain solvent.
Within the next 24 hours, the New Zealand government is also expected to announce its plans for a guarantee system for wholesale deposits to shore up the liquidity concerns surrounding the inability of the trading banks to secure funds in the London market for their lending operations within New Zealand. This should, perhaps, have been a first step in any deposit guarantee system rather than the retail deposit guarantee, especially as there was no imminent threat of a depositer run on banks.