How the capital markets captured local councils in New Zealand

Heather Smith

In the years immediately preceding the 2008 crisis, officials at the NZ Stock Exchange worried that prospective players were being lured by brighter lights in the ASX. Together with the Business Round Table they persuaded the government that “deepening” the capital markets would be good for the whole economy. Consequently the then Commerce Minister, Labour’s Lianne Dalziel, appointed a task force in mid- 2008 to examine the situation with a request to report back a year later. She expressed delight that leading investment banker/broker, Rob Cameron, had accepted the role of chairman. Within a few months the world witnessed the fall of Wall Street’s Lehmann Brothers and a jittery electorate rushed to vote in a National-led government.

By mid-2009 Rob Cameron presented his Capital Markets Development Task Force report to Parliament. Among its recommendations were two of great concern to patriots, and especially to monetary reformers. One recommended further sales of state-owned enterprises. The other was for the establishment of a special bank for the purpose of debt-funding local councils, anticipating greater reliance on borrowing because of infrastructure deficits. Officially, these “brilliant” ideas emanated from a Jobs Summit earlier in the year. But this writer and other watchers had already observed the events motivating Task Force members.

Over the following two years a plan was developed for Treasury’s Debt Management Office (the NZDMO) to launch the Local Government Funding Agency.

During mid-2011 the Local Government Borrowing Bill enjoyed a smooth path through all readings, supported by both sides of the House. Only one political party (currently not in Parliament) registered its objections to the Select Committee, i.e. Social Credit, whose former MPs had struggled unsuccessfully to revive the use of Reserve Bank funding for local bodies.

Before long forty-four councils had paid the fee to join the LGFA, having bought the “spin” that loans could be arranged at half a percent lower than usual, i.e. about 7% – thanks to economies with brokerage plus the S&P credit rating of AA+ (same as for the government). Few recognised the fact that public debt has been given a very low risk-weighting by successive Basel guidelines for obvious reasons.

So much for capital markets investors boasting they are risk-takers. The give-away comment exposing the real modus operandi behind the LGFA came from its first CEO, Mr Phil Combes (formerly of Tasmania). He expressed his enthusiasm about “one of the great adventures in New Zealand’s debt capital markets” adding that “the LGFA has achieved its primary purpose –. deepening the capital pool and improving the duration of debt available to councils in New Zealand.” Meanwhile the establishment board was awarded the KangaNews Achievement Award “for their contribution to the development of capital markets in New Zealand”.

More recently, LGFA chairman, Craig Stobo, announced with pride that “our investor basis has widened from NZ government institutions, local banks, fund managers and retail investors to now include non-resident institutional investors from Australia, Asia and the UK/Europe …. Directors consider the growing support of non-resident investors to be critical to the continuing success of the Agency’s future borrowing programme ….” In other words, interest rates may be a fraction lower but increased total debt is likely to be quite lucrative for the lenders.

The latest borrowing projections endorse this last statement. The total lending to Participating Local Authorities (PLAs) by June 2016 is expected to be $5,885 million, increasing to $7,097 million for the year ending June 2017. This explains why every NZ council promises “lower rate rises” in its annual budget but never “lower rates”!

To date no current New Zealand MPs, academic economists or journalists have asked the question: Who or what decreed that ratepayers and taxpayers are expected to keep the debt and equity markets buoyant?

Heather Marion Smith is an ERA member living in New Zealand, now retired from teaching and formerly Economics Convenor for NZ National Council of Women.