DID IT PAY?

Dominion, Volume 4, Issue 931, 26 September 1910, Page 7

DID IT PAY?

A MUCH DISPUTED CONVERSION OPERATION.

THE RESULT. "

SUBSTANTIAL LOSS TO DOMINION.

For' some time past there hav>e been sharp. passages in Parliament between, the Prime Minister and Mr. Massey on the subject of the conversion of certain. debentures in 1894. The matter arose out of a reference by the Leader of the Opposition: to the seizure, of accumulated sinking funds : associated with the transaction, Mr.-Massey arguing that. the sinking fund scheme introduced this session by ..ithe Prime Minister was liable to -lead "to. similar results at'.some'future-, time. That is to say, the sinking funds were liable to be. seized, and diverted to other purposes than . loan extinction.'- Involved, in the argument was a further question of whotW or not tho conversion •transaction hadvbeon a profitable one .for the country. -Mr.. Massey said it : had not, and produced a certificated accountant's analysis of. the'operation to support his contention. The Prime Minister argued to the contrary effect, and 'he produced a statement. supporting his view signed by Treasury officials.; The report of the Treasury officials . has made no,' allowance for tho interest-earning; powers of the accumulated; sinking funds attached to the and therefore fails to show 'the •position correctly. The: report of Messrs. Barr, Lcary and on the other hand,' covers ;; the .-. whole ground, and in the main essentials is ■ supported by' our own conclusions, which will be found below. ' i In order to ■ clearly understand - the figures,, it is necessary to,explain that , in 1894 a £500,000 4 per cent. Imperial guaranteed loan was, converted - into 3£ per cent. inscribed: stock.;,--. Bi® halfmillion loan fell due iin 1915, and ccrtain sinking - funds had .; accumulated. The- conversion', operation increased the total of. the debt ' from £500,000 to £616,000,: but the rate- of interest- was reduced from ;4, per cent, to 3i per cent. The result of the conversion of the loan and- the seizure:.of sinking funds will be 6eca to havo worked out as follow: — > Prior to; tho conversion referred to. above, the debt .of ithe colony in regard .'to. this particular loan stood thus;— ■ • ; ' ; "v.- ' '■ Y:' v iß ■ Guaranteed 4 per cent. Debon- : tures ;: i 500,000.; . Debentures,issued to date;for : ' accretions of Sinking Fund ' from 1884 to 1895 96,371 : ' ; v ;■ ~ . 595,371 At same , data:'.tho Oommis- - . v sioneni of Sinking Fund : ' tad in - thai!.' possession . . .accrued. Sinking Funds be- '.- longing to t'nta Loan , ; valued. at : .260,073''V'i Net debt £336,298 ' The position after tlio 1 conversion'operations were completed was as follows:— . . 3| par cent. Etock £616,000 . At this date- there was no-, . : thing in the possession of': _ - the . S.P.' Commissioners to the credit of this, loan: . ' the : £260,073 having; been ap- : . - plied ■; as follows:—£96,37l' to,: ' ... , redeem , the Debentures issued for accretion to S. • • Funds, and tie : balance, . ; £153,702, having been paid into tho • Public "Wortss ' .. , Net"deS'"Xll^Zl3'£6l6,oooi : ; ; . Deduct amount net debt prior' .. . . to conversion-, 336,298 ',:, Increase of debt owing to con- .. •'■ version £279,702 ' : . , Against this increase, of tho Publio Debt' there mtist, however, be. recorded- the.fact that the Government of that day secured for the Public Works . Fund the'use of £163,702 in cash. : • ........" -■: - Let us prooeed. now to see how the interest charges in respect of this transaction work out. ' : V'. : , During the twelve months prior to this conversion, ithe following . .was: paid j--4 per cent, on £500,000... 20,000 4| per cent, on £96,371 .... ; 4,337 ■ ■■ T ' ;> , . 24,337 •, It must be borne;, in 'mind' : : ■ , ; that the accumulated Sink- \ . ing Funds belonging to this • . Loan, viz., £246,243, ; were. •; '; ' ■ "yielding to . the. Oommis- ... ' ; sioners Interest 'at the rato of 3.97 per. ccnt, amounting to 9,775 Net interest ...; 14,662 ; r Sinco''the conversion was completed,' there Jias been paid l :annually as Interest:— : '3J per cent, on £616,000,;....:.. 21,660 ! Annual charge for man- ■ '. . •'•- agement, £500 per mil- . ■ '. lion, on £616,CC0 .., £308 ' :-vV;•] .; liess;.i. per: oeiit.. commis- , sion on -payment of , .'. . , £20,000 Interest £0 " 21,918 . ; Deduct net Interest charges. /. prior to conversion 14,562 . "v' Increase of Interest' chargesowing to conversion' :: £7,356. .If. the above conversion had .not '• been effected r-it is' ■ claimed- that it would have : , .- - : . ,been necessary, to borrow ' '' ■ V. £163,702. Had .this. been ; done, tho Government would • .liavo had toi sell-£173,000 of : 3j stock at 96, in order: to ■: . . seearo a net result of ■ ■ £163,702. ' - Thus Interest at 35 per ' .cent, on £173,000......'.'...:.... 6,055 - Management charges 86 -, ' J. 141 Not Increase. In Intorcst charges owing to Conversion'£l,2ls ■ It will thus bo seen that in order to secure the uso .-of . £163,702 in cas-h. for public worksjl, purposes the " debt ' ' of New Zealand was increased by £279,702, thus entiiiling a loss of capital to the extent of £116,000. It is true tho £163,702' was not borrowed; 1 but; a national asset to: that amount in tho hands of -the Sinking Fund Commissioners, ceased to, exist after tho' conversion. -'• ' : '-. i ' ' Had the conversion not' taken. placo, •and had tho £163,702 been borrowed in .the open-market at that time, the difference between this sum and £173,000 (tho amount of 3J per cent, stock requiring to bo sold, as shown by the .Government's own figures) would have represented, the.; only.. loss of capital,' viz., £9208. ■-... Deducting £9298 from £116,000 leaves £106,702, which' sum -represents, the net'.-loss in capital owing to the -conversion operation, and to this has to be added the annual sum shown above of £1215 for increased interest charges. , Yet, tho : Prime Minister argues;that the conversion; of the loan was a justifiable finanoial transaction. ■ Plainly he is wrong.