Govt loses $8.5M on default

Press, 1 February 1986, Page 8

Govt loses $8.5M on default

By

MARTIN FREETH

in Wellington

The Government has lost about $8.5 million from the sale of the $lOO million in stock defaulted on by Rakiura Holdings. The Reserve Bank accepted an average rate of 19.36 per cent in a special tender of the $lOO million of October, 1991, stock which Rakiura Holdings failed to settle for two weeks ago. The rate was well above the 16.69 per cent which Rakiura Holdings successfully bid for the stock in the bank’s December tender.

Government stock rates have generally moved up since then, and yesterday’s results, and the loss resulting from having to re-tender the $lOO million, is in line with the expectations of money market dealers. The range of rates bid by the 66 institutions successful in the tender was 19.20 to 19.39 per cent The Reserve Bank refused to give its own calculation of the loss. However, the bank’s Governor, Dr R. S. Deane, advisers to the Minister of Finance, Mr Douglas, and

dealers, all rejected an assertion by the Leader of the Opposition, Mr McLay, that the loss was actually $15.16 million.

Mr McLay said the taxpayer would pay, annually, an extra 2.67 per cent during the term of the stock because of the higher rates accepted in the special tender.. Dr Deane ' said Mr McLay’s calculations indicated a misunderstanding of the “quite simple matter" of how the Government stock market worked. The rate of interest paid to stock buyers twice

a year is determined by the "coupon” rate of the stock, which is 16 per cent. Rates bid in tenders are effectively the price which dealers and investors are prepared to pay for the stock. The loss results from the difference of about $8.5 million between the price implied in the Rakiura Holdings bid and the successful bids in the special tender. Dr Deane agreed with market dealers that the loss was between $8 million and $9 million. The Government will save a small amount in interest payments because

the new buyers will pick up their stock a month later than Rakiura Holdings should have done. Mr Douglas said the bank's review of the stock tendering system was almost complete and changes would be announced next week. He indicated that the changes are unlikely to tighten substantially the criteria for participation in tenders, which would limit competition in bids to buy stock. Mr Douglas minimised the Significance of the Rakiura Holdings default, saying the tender system had raised almost $8 billion since it was started in

September, 1983, and was an "efficient, low-cost” way of raising funds to finance the Government’s Budget. The average rate in the special tender was down slightly on the 19.42 per cent paid for $lBO million of stock of the same term at the regular January tender a week ago. The market is awaiting details of the February tender, which will be announced next week. Mr Birch, page 22