Norman Russel: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — Second Reading 
Text is incorporated into the Bound Volume 
Norman Russel: Reserve Bank of New Zealand (Covered Bonds) Amendment Bill — Second Reading 
[Sitting date: 14 February 2013. Volume:687;Page:7915. Text is incorporated into the Bound Volume.] 
Dr RUSSEL NORMAN (Co-Leader—Green) 
: 
 I stand on behalf of the Green Party to speak to the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill. What this bill does in a nutshell is facilitate and regulate the ability of the New Zealand banks to borrow from overseas. That is the essence of the bill. And that should be a worry. For people who are concerned about the increasing indebtedness of the New Zealand economy as a whole what this bill is a reflection of is that the New Zealand banks are having to go further overseas in order to borrow more money to fund our current account deficit. 
But before I get on to the general problem around the current account deficit I wanted to start with some of the specific concerns why depositors in banks should be interested in this bill. If you have a deposit in a New Zealand bank the reason you should be interested in this bill is that it means that if the bank goes belly up other people will get access to the bank’s assets before you. That is what a covered bond means. When the banks want to borrow from overseas what they will be doing is going to overseas lenders and saying that they want to borrow some money. The lenders will say: “OK we will lend you money but what is the asset?”. What is the mortgage if you like against which they will lend the bank money? What the New Zealand bank will do is put up an asset or some of its assets which are basically going to be housing loans and say: “Look we will borrow money off you and if we go belly up you get this asset.” What that means however is that if the bank goes belly up the New Zealand depositors are not first in the queue to access those assets. That is fundamentally what a covered bond means. It gives priority in the queue of creditors to whomever loaned the money to the bank for this covered bond. That means that the depositors are not first in the queue to access those assets if the bank goes bad. That is a significant development. 
What we found out in the course of the Finance and Expenditure Committee inquiry is that this is already happening. Speaking for myself I was unaware of it. The covered bond market is already developing in New Zealand. The banks are already engaged in this practice. So in some respects we are regulating a practice that has already started. 
We are going to be supporting the bill because we think it is essential that we do. But I think it is important to understand what is happening here. We are so far down the debt track as a country—I am not talking about the fiscal position of the Government; I am talking about the country as a whole—that now we are advancing into these new ways of borrowing money from the rest of the world to fund our current account deficit. But that means that if the banks go belly up depositors will not be first in the queue to access the bank’s assets. So it does put depositors’ money at risk as a result. Of course it does facilitate the banks accessing this money and so it does add some stability to the banking system in that respect but there is a downside to it and we need to be aware of it. It is important that there is a limit on what proportion of the bank’s assets it can borrow through the covered bond market because whatever that proportion is—and it is set at 10 percent currently by the Reserve Bank—that is the proportion of the bank’s assets that depositors will not have access to if the bank goes belly up and we try to fix it. 
I think the bigger policy issue that sits behind this bill of course is the problem of the current account deficit. The reason why the banks are continually going to the international market to borrow more and more money is that we are running a large current account deficit. Over the last decade basically the banks have been borrowing money overseas and shuffling it through to the private housing market. Aside from the credit the New Zealand banks have created themselves they have also been borrowing from overseas and they have been passing that through into the housing market. We have seen a dramatic expansion in the housing market in New Zealand fuelled by this cheap credit. The price of housing in New Zealand doubled between 2002 and 2007 and that housing market inflation is one of our problems. It is one of the reasons we are borrowing all this money and it is also part of the bigger picture of why we continue to have a current account deficit. 
The current account deficit is predicted to increase to 6.5 percent of GDP by 2017 according to Treasury. That is a very large and very unsustainable current account deficit. So if we do not have the policies in place to address that current account deficit we will need not just the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill; we are going to need a whole stack of measures to borrow more and more and more money from the rest of the world to fund our current account deficit as a country. The Government seems pretty happy about that. Originally when it first got into office it was not happy about that. It said we had to rebalance the economy. There are many metrics for rebalancing the economy but probably the single key metric is the current account deficit. So initially Bill English quite rightly said we need to deal with this problem. Of course since he has been in Government the problem has only got worse because the current account deficit continues to grow. It went very high during the Labour Government and that was a huge problem. Then it dropped dramatically during the global financial crisis and now it is steadily rising again. 
As we undermine the export and tradable sector with our very high currency which the Government insists it must do nothing about that very high currency is creating tremendous problems for our exporters and manufacturers and that means that our current account deficit is going to get worse. If we cannot trade our way out because our currency is overvalued—the IMF says the currency is overvalued by 15 percent; it is probably more than that by now—then our current account deficit will only get worse. The high New Zealand dollar also means that imports are cheap so we buy lots of imports. It also means that businesses in New Zealand that are competing with imports are being driven out of business. As we knock out these businesses that are fundamental to our tradable sector we are making our current account deficit worse and that means that we have to borrow more and more money from the rest of the world or sell assets to the rest of the world. There are only two ways to fund a current account deficit—short of quantitative easing there are only two ways—and they are by borrowing from the world which this bill facilitates or by selling assets whether it is the Crafar farms or whether it is the one the Canadians recently bought. You can sell your land. 
 Essentially when the Government says it is happy with its current policy settings what it means is that it is happy selling more and more land and assets into overseas ownership to fund the current account deficit. What the Government is saying is that it is happy with a situation where we are borrowing more and more from the rest of the world in order to fund the current account deficit. The problem with the Government’s strategy in that respect is that once you borrow the money you have to not only pay back the original the money that you borrowed but also service the loan the interest payments which adds yet more burden on the export sector which is the one that has to pay this interest. Once you sell all these assets the profits that come out of the assets whether they are the farms or other kinds of assets go overseas to the owners because that is why they bought those assets. The foreign owners were interested in buying those assets in order to access the profits that come from them. Those profits then travel overseas and add to your current account deficit. So it becomes an ever more difficult problem to solve the longer you run a large current account deficit. The problem for New Zealand is that we are going further and further down that track. 
We have this bill in front of us which at one level is a rational response to the situation we are in. We are trying to facilitate and regulate borrowing more money from overseas via the banking system through covered bonds. It is a rational response to the immediate situation we are in. The Greens will support it for that reason. It is not a rational long-term solution to the challenges facing the New Zealand economy. So the Government might get this bill through or whatever and say: “Oh well we will carry on. People can still afford cheap flat-screen TVs.” but the way that we are affording cheap flat-screen TVs is we are borrowing the money and we are selling our assets to the rest of the world. I tell you that is not a sustainable strategy. That is why the Greens have been pushing unorthodox—in New Zealand—policies such as lowering the official cash rate and using loan-to-valuation ratios to control housing inflation so we can have a lower official cash rate to put downward pressure on the exchange rate and unorthodox policies like quantitative easing in order to pay for the Christchurch rebuild because we think it is critical that we deal with the problem of the current account deficit. Anyone who wants to have a glib debate about printing money or all the rest of it—which is all we have really got from the Government or Shamubeel Eaqub who is the Government’s favourite economist—those people who want to have that glib debate are not dealing with the real fundamental challenges that are facing us. If we do not deal with the current account deficit we have no choice but to borrow more money. We have no choice but to sell further assets. A Government that does not want to deal with that problem is a Government that is not working in the long-term interests of New Zealand. 
We will support this bill because it gets us through where we are now but let us be absolutely clear: we need solutions to the problems we face.