Taxpayers to remain on the hook for billions of dollars worth of bank wholesale debt until 2014

By Gareth Vaughan

The taxpayer will remain on the hook for bank bonds worth billions of dollars that are covered by the Crown wholesale funding guarantee scheme for another three and a half years despite the scheme having been closed and despite the Australian parents of local banks now buying back their Australian government guaranteed wholesale money.

The latest Crown financial statements show that, as of February 28 this year, the value of wholesale bank securities guaranteed by the taxpayer was NZ$9.8 billion. No provision has been made in the government's financial statements for losses under the wholesale scheme as Treasury considers the possibility of losses a "remote" one. Under the wholesale guarantee scheme banks were able to effectively rent out the government's AAA credit rating to raise wholesale funds during the global financial crisis.

The wholesale funding guarantee facility effectively closed from May 31 last year after the Crown had issued a total of 25 guarantee certificates. However, the benefit of the guarantees stays for the securities until their scheduled maturity (the banks issued guaranteed debt for terms of between two and five years), meaning the money progressively matures right through until October 2014.

Of the country's big five banks, only ASB didn't raise any wholesale funding under the scheme. BNZ Treasurer Tim Main says his bank has about NZ$2.4 billion of government guaranteed debt on issue. The latest figures from Westpac and ANZ's general disclosure statements show Westpac had NZ$4.1 billion as of its September 30, 2010 financial year end, and ANZ had about NZ$3.03 billion worth at the same date.

Kiwibank has its A$250 million (NZ$332.9 million) five-year Australian bond issue covered. Due to mature on October 20, 2014, the expiry of the state owned bank's wholesale guarantee certificate will bring the curtains down on the scheme.

However, much of the guaranteed money doesn't mature until 2014. Westpac has US$1.325 billion (NZ$1.7 billion) maturing in July 2014 and BNZ has substantial yen denominated maturities in 2014 plus about NZ$595 million in local currency. ANZ has US$171 million (NZ$217 million) maturing as far out as 2014.

Should any of the banks with wholesale government guaranteed debt on issue get into trouble before the debt matures, the taxpayer would have to foot the bill.

Aussie banks buying it back

In Australia the major banks, owners of New Zealand's ANZ, ASB, BNZ and Westpac - have increased their efforts to buy back tens of billions of dollars worth of Australian government guaranteed wholesale funding as they strive to replace it with cheaper funding.

For an overseas issue a fee of 70 basis points per annum was paid for the life of the deal. So, for example, the fee on a US$100 million five-year bond would have been US$3.5 million. See more on the fees here.

"At 70 basis points, if you pay that upfront, it becomes very difficult to buy paper back at an economic level," Martin added.

But unlike the retail deposit guarantee scheme, where the taxpayer faces a NZ$1.2 billion tab after the collapse of nine finance companies, the wholesale scheme has made no payouts and will generate about NZ$290 million in fees for the government.

'Risk averse' investors drove the scheme

The wholesale guarantee scheme was unveiled by then-Finance Minister Michael Cullen in November 1, 2008. It was offered to financial institutions with investment grade credit ratings and "substantial" New Zealand borrowing and lending operations, with Cullen citing an environment where international investors were risk-averse and where many other governments had guaranteed their banks' debt.

"In such an environment, the government believes that it is on balance in the public interest to offer a wholesale funding guarantee facility that can help maintain the economy's access to foreign credit," Cullen said.

Treasury Secretary John Whitehead and Reserve Bank Governor Alan Bollard said in 2008 the main goal of the facility was to support the re-entry of New Zealand banks to regular foreign debt markets, on a scale "commensurate with our economy’s overall financing needs." The guarantee was structured in a way that would encourage issuers to graduate from using a government guarantee as soon as reasonably possible, they added.

Banks using the guarantee were told to maintain an additional 2% capital buffer, on top of the existing required 4% Tier 1 capital already required to help protect the Crown’s position as guarantor.

(Update adds comments from Westpac spokesman).

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