Nash Stuart: Local Government Borrowing Bill — In Committee 
Nash Stuart: Local Government Borrowing Bill — In Committee 
[Volume:675;Page:21177] 
STUART NASH (Labour) 
: 
 Mr Twyford and the Minister of Local Government have actually outlined some of the points I had but there are a couple of other points I would like to make in this Committee stage of the Local Government Borrowing Bill. I agree that Auckland is now so large that it needs to own its own future. It has to have the ability to go offshore because the depth of our capital markets is just not big enough for it. I understand that. I suppose the Auckland City treasury will have to determine itself how much money it wants to put into the rating agency versus how much it wants to borrow on the back of its own council. It would be interesting to know how much it would do that because again as the Minister alluded to I suppose the funding agency will be reasonably dependent upon the level of funding the Auckland Council can put into that and therefore the scale or the rating the funding agency will have in itself. 
There are two points I would like to make and two not really questions but reasonably significant points in my mind. The first one is the report to shareholders and stakeholders. The Auckland Council is responsible to well over 1 million people who pay the rates and who will service this debt. I think it is up to the Auckland Council to make absolutely sure that the ratepayers and the stakeholders know exactly what the Auckland Council is doing and what its policy is. Mr Twyford mentioned that the Auckland City treasury has said it will undertake a fully hedged strategy and I agree with that. But let me give members a couple of examples because I think that currency risk is now huge. This adds another risk on top of all the other risks that councils have to manage. I know for example and the Minister himself might remember that when the New Zealand dollar was about US70c at one stage—this was late last century—it plummeted. It went from about US65c down to about US50c in about 6 months. Carter Holt Harvey was I think New Zealand’s second or third-largest company at the time. Its treasury had a hedging strategy but it also played the currency markets to a certain extent. It lost literally millions and millions of dollars trying to bet on the New Zealand currency which it had no idea about. There were jokes going around about how to play the currency markets. One was that we ask 10 economists and we go with what the minority says. 
The bottom line I suppose what I am trying to say is that no one knows how to play the currency markets and win. It is a little bit like putting it on black at the casino: one wins sometimes; one does not win at other times. This is a risk. I think—and I would really like to know but I do not think that the Minister can tell me because it is an operational matter—that the Auckland Council must tell its ratepayers how it is going to manage. I remember that I went to a seminar once that was conducted by Deutsche Bank which was at the time—well it still is—one of the largest banks in the world. This seminar was for small to medium sized business owners. The advice from the head of Deutsche Bank at the time in terms of overseas trading in US dollars was that he would hedge 50 percent and then he would play the currency markets with the other 50 percent. I was astounded that a banker could give this advice to business people who relied on the margin of the deal being done. He was basically advising these people to play the currency markets and it was astounding that he would give that sort of advice. This is why we have to be very careful and we have to have a very good understanding of the strategy that the Auckland Council will take in terms of borrowing in foreign funds. I have no doubt that at some stage a smart banker will stand up at council and say that if it had not hedged at US83c as the dollar went down to US70c it would have made a whole lot of money. We are all very wise in hindsight when it comes to currency trading. Believe me we are very wise in hindsight but at the time if the strategy is not on the table and if it is not followed very very strictly then I tell members there will be accusations of mismanagement and there will be court cases. Of that I have no doubt whatsoever. 
Again let me give members two examples. I used to deal with two large New Zealand companies that imported. One hedged for the whole time. The other one did not because it took advice from—I will not name of the bank but one of New Zealand’s largest banks. This was when the dollar was at around US50c. The bank said not to hedge and not to worry as the dollar would be up to about US55c by Christmas. By Christmas the dollar was down to US45c and that company had lost about $2 million by just playing the currency markets. I suppose my point is that the council and anyone can take advice from a whole range of people who say they know how to play the currency markets—what they are about and the best strategy to make money with them—but no one knows and no one gets it right 100 percent of the time.