New Zealand Gains Currency Swap Facility with Federal Reserve as New Zealand Election Looms

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.

While You Were Sleeping... Federal Reserve Acts with Massive Global Liquidity Injection

The US Federal Reserve acted in the dead of night to try to stem the tide of the global financial crisis that rose to a economic tsunami level in recent days as major bank and insurance company failures in the U.S. and U.K. threatened a systemic failure of financial institutions around the globe.

In a press release dated 3 am, September 18, the Fed announced its Federal Open Market Committee (FOMC) has authorized a $180 billion currency swap with other central banks, namely the EU's European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and the Bank of Canada. These arrangements will underpin the extension of greater liquidity to the financial systems of the respective countries in the hope that global financial markets will settle down after the wave of recent failures of large financial institutions.

No news yet out of the Reserve Bank of New Zealand as to its reaction to the moves.

On the good news front, the Reserve Bank Amendment Bill (No 3) was passed by Parliament on 3 September making the Reserve Bank the regulator of non-bank deposit takers such as finance companies, building societies, and credit unions. One fly in the ointment: the Reserve Bank will assign an important role to "reputable" credit rating agencies in the new regulatory set-up, the same kind of credit rating agencies implicated in failing to effectively monitor the sub-prime meltdown in the U.S. Huh?

Nothing like waiting till the horse has bolted. Shame on governments and policymakers both in the U.S and New Zealand for not having established effective regulatory regimes 30 years ago when they liberalized markets concurrent with a wave of new financial innovations in the form of financial derivatives.

Perhaps they would be singing different songs from these now:

Heard in many financial districts around the world this week:

Meantime, the Central Banker Chorus is wailing:



Wake Me Up When It All Ends...