Ministerial Statements — Financial Situation—Stability Measures

I wish to make a ministerial statement under Standing Order 347. I want to make a statement to the House at the earliest possible time about the serious international financial situation that has developed over recent months, the impact that situation has had on New Zealand, and the measures that have been taken to address the situation since the House last met before the election. Had Parliament been sitting, I am sure the previous Minister of Finance, Dr Cullen, would have informed Parliament of these events at the time.

Since the House last met on 26 September, the world’s financial markets have experienced considerable disruption. In particular, confidence in the global financial system has deteriorated markedly, and credit markets have become dysfunctional. That affects New Zealand banks, which are net borrowers from those markets. Linked to that, global sharemarkets have fallen sharply and economic conditions in many countries around the world have deteriorated rapidly. The outlook remains difficult.

As members will realise, Governments and financial authorities around the world have taken an unprecedented range of steps to protect financial systems and to minimise, to the extent that is possible, the adverse economic consequences that are likely to flow from the financial markets. Those measures include easing monetary and fiscal policy, supporting banks and financial institutions, and enhancing global cooperation on economic and financial issues. Of direct relevance to New Zealand, Governments in a wide range of countries, including Australia, have moved to guarantee deposits in financial institutions.

I would like today to inform members of two particular steps that the New Zealand Government has recently taken. The first step is retail deposit guarantees. As the House had adjourned on 26 September and Parliament had been dissolved on 3 October, before the election it was necessary to use existing statutory powers to take timely action. Accordingly, the power in the Public Finance Act 1989 for the Minister of Finance to give guarantees was invoked and was delegated to the Secretary to the Treasury. Under that delegation, the secretary may issue Crown guarantees for the retail deposits in banks and other financial institutions that meet certain criteria when that appears necessary or expedient in the public interest. I can inform the House that retail deposits in all the major banks and many other institutions are now covered by a Crown guarantee. Full details of the guarantee scheme, including the entities it covers, are on Treasury’s website.

In order to protect taxpayers, the guarantees are limited in time and extent. I am advised that the amount of deposits covered by the retail guarantee, as at 30 November 2008, is approximately $125 billion, and the Crown’s contingent liability is therefore that amount. The amount will increase if more retail deposits fall within the scheme. It is an extremely remote possibility that anything approaching the full amount would be required to meet the Crown’s obligations.

The second step is wholesale funding guarantees. New Zealand banks depend heavily on foreign funding, and the wholesale banking markets have been largely closed in recent months. Unless ready access to those markets can be re-established, it is likely that pressures on the availability of credit in New Zealand and on the exchange rate could intensify next year. The previous Minister of Finance announced that the Crown will guarantee, using the same statutory power, specific wholesale financial instruments issued by major financial institutions if they meet the specified criteria. Acting under delegated authority, the Secretary to the Treasury must be satisfied that it appears necessary or expedient in the public interest to proceed with the wholesale funding guarantee. Officials are working actively with banks to facilitate use of the guarantee facility. To date no wholesale deposits have been guaranteed. Advice from Treasury is that the wholesale scheme could involve guarantees of up to $150 billion. The scheme is offered on an issue by issue basis, so it would approach that amount only if the scheme continues to be offered for several years. The Government will continue to manage the scheme carefully on behalf of taxpayers.

In addition to those steps taken by the Minister of Finance, the Reserve Bank has taken steps to reduce the official cash rate and focus on its prudential monitoring of banks and non-bank deposit takers. The bank has reduced its rate—most recently, a 1.5 percent reduction to 5 percent on Thursday, 4 December. As well, the Reserve Bank has reiterated its confidence that the country’s banks continue to be solvent.

I am sure that the measures taken to date will go a long way to maintain confidence in New Zealand’s financial markets and mitigate the effect that international trends will have on the economy over the next year. These financial events have unfolded rapidly and may continue to do so. We will consider any further response, should that be necessary in the interests of the country.

I acknowledge the role played by the previous Minister of Finance. Given that these issues arose in probably the most politically difficult circumstances of an election campaign, all matters were dealt with, from our point of view as the then Opposition, in a professional, open, and transparent way.

As this is the first ministerial statement in the forty-ninth Parliament, it may be helpful to new members if I explain the process. The specified leaders of parties with six or more members have 5 minutes to respond to the statement, and the Minister who makes the statement has 2 minutes in reply if he so desires.

The Labour Opposition supports the measures outlined in the statement made by the Minister of Finance to the House today and acknowledges with gratitude his comments regarding the role of the outgoing Minister of Finance. New Zealand’s banking and financial system is fundamentally sound. New Zealand’s economy is well placed to respond to international turbulence, and the Government’s balance sheet is sufficiently robust to underpin the guarantees outlined by the Minister. It is important for New Zealanders, therefore, to feel safe and secure in respect of their savings. Accordingly, Labour supports the retail deposit guarantees issued under delegation by the Secretary to the Treasury.

Labour also notes that appropriate limitations are required to protect taxpayers from inappropriate risk-shifting and to ensure that guarantees are of appropriately limited duration. Labour also supports, albeit with some reluctance, the need for wholesale banking guarantees to ensure that New Zealand’s financial institutions have access to international credit flows on secure and equitable terms. With most developed country Governments offering such guarantees, New Zealand must also adopt this action. The need for access to liquidity also underlines the ongoing importance of domestic savings vehicles, principally KiwiSaver, as well as the importance of the ongoing prudential role of the Reserve Bank of New Zealand.

Labour believes, however, that better international coordination is required on how to exit these levels of exposure by sovereign Governments to risk. This will require a thorough review of international economic and financial cooperation over time. In our view, further consideration is also required, in light of these guarantees, of the stubborn residual differentials between domestic and, for example, Australian interest rates. Thank you, Mr Assistant Speaker.

I thank the Minister for his report to the House. The guarantee schemes have been well signalled in the media and there were no surprises in the Minister’s statement this morning, but it is appropriate, nevertheless, that it be brought to the House at the first opportunity, and I thank him for doing that. I have a few questions that I would find it very helpful if the Minister could enlighten us on, if he intends to take his 2-minute reply at the end of this debate.

If we are taking a $275 billion contingent liability on New Zealand’s Crown balance sheet—and I accept that that is a worst-case number—then what are we asking for in return? This measure removes all risk for banks and depositors, underwriting it by the taxpayer. How will that change risk-taking behaviour by the banks and by depositors? How will we prevent the banks from taking huge risks at our expense? New Zealand’s banks are largely owned in Australia, and they repatriate their profits to their Australian owners. To the extent that this measure increases the profitability of the New Zealand banks, what limits will the Minister place on the repatriation of those profits, or will New Zealand taxpayers be basically sending money out of the country to the Australian owners of our banks? Will any action be taken to limit the grotesque salary packages that the chief executives of those banks are still taking, now that they are in a situation where they really are not taking any risk? What form will the Reserve Bank’s increased prudential oversight take, and what do we anticipate will be the results of that? What role will New Zealand play in the international discussions about better international oversight of the financial markets, in order to prevent this situation from happening again?

Finally, given that we are in urgency and we are considering matters that the Government thinks are very urgent, I am wondering where the package is that the Government announced before the election to help out people who lose their jobs and cannot meet their mortgage payments. That was an election promise. Are we to wait until February before legislation is introduced to help them, or is something planned for next week? Is that not actually one of the more urgent things that the House should be considering at the moment?

Thank you, Mr Assistant Speaker, and I look forward to hearing any answers that the Minister may give us.

I will be able to answer the question about the redundancy assistance package separately. The member raised a number of issues, as did the spokesperson for the Labour Party. Probably the simplest answer to their question of what the Government gets in return for the guarantee is the price that the banks are being required to pay for it. It may well be useful for us to get the officials to give the parties a fuller briefing on just how that price works.

But the member raises a number of other very perceptive and difficult questions about the impact the guarantee will have on risk and behaviour in the banking sector, and I have to say I share with the former Minister of Finance his deep reluctance about going into this measure, because it is hard to make it work well, and even harder to get out from under it in the end. So I make that offer about the briefing, and we can discuss that further. I make one other undertaking, in the spirit of the process started by the former Minister of Finance: where matters of a serious nature that are related to financial stability come to our attention, we will endeavour to keep contact with and brief other parties in the same way as Dr Cullen did before the election.

I raise a point of order, Mr Speaker. I take this opportunity to place on record my appreciation of Mr English’s approach to this issue during the election campaign. It was a very difficult issue at a very specific and difficult time, and it could easily have run off the rails. I would also say that if anybody ever asks me, I might at some stage reveal more fully some of the other fraught circumstances that surrounded the entering into of the guarantee schemes, but this is not the time for that.

The ASSISTANT SPEAKER (Eric Roy): In that respect, you are correct: it is not the time for that. I understand that it is the intention of the Government to introduce a bill.

I raise a point of order, Mr Speaker. I understood I had an opportunity to respond to the ministerial statement.

The ASSISTANT SPEAKER (Eric Roy): No, at the outset I explained the process associated with a ministerial statement, which is that the leaders of parties with more than six members have an opportunity to respond to it. Thank you, Dr Sharples.

Debate interrupted.