Saturday, November 1, 2008

New Zealand Government Issues Wholesale Funds Guarantee as Election Nears

The New Zealand government has moved to provide a guarantee on wholesale funds in the financial system. The objective is to assist the re-entry of New Zealand financial institutions into foreign currency-denominated international lending markets but will also be available to cover NZ dollar denominated debt. Press statement here. Operational guidelines here.

Financial institutions will have to opt-in to the scheme by institution and by debt instrument. Issuers will be required to disclose whether or not particular paper is government guaranteed.

Only institutions with an investment grade credit rating of BBB- or better will be permitted to use the facility. The wholesale guarantee will only be available to financial institutions and not to corporate or municipal issuers of paper. The guarantee will only be available for up to 125 percent of an institution's total stock of eligible types of debt on issue prior to the intensification of the global financial crisis, dated to 12 October 2008.

Only paper issued in NZD, AUD, USD, EUR, GBP, CHF, JPY, HKD, and SGD currencies will be covered.

Guarantee fees will be charged on the basis of the particular financial institution's credit rating. Dr Cullen, Minister of Finance, estimates that the fees could raise NZ$1 billion which will be set aside as a fund to cover the guarantees in event of defaults.

The scheme will be continued until financial market conditions return to "relative normality for a sustained period" but given the nature of the international financial crisis "the guarantee scheme is likely to continue to be offered for some time."

Together with the US$15 billion currency swap arrangement with the US Federal Reserve announced mid-last week, the wholesale guarantee scheme should act to underpin the short term fund raising undertaken by New Zealand's trading banks in international markets.

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