BANKING

Hokitika Guardian, 22 April 1932, Page 2

BANKING

AND CURRENCY IN N.Z.

INTEREST RATES IN GOVERNMENT SECURITIES.

(By “The Banker” in the N. Z. Financial Times.)

For the sake of New Zealand’s credit, it is to be hoped that legislation is not, for the purpose's of immediate expediency, introduced with the object of reducing interest rates on cm rent Government internal loans, if such a step is contemplated, and even if a conversion be a so-called voluntary one, a measure of this kind will have far-reaching long run effects. A reduction 01 interest on Government loans would, it is admitted, give some

ncn.uro oi immediate relief to the budgetary position by reducing expenu.ture, but consideration of the question as to whether :>. reduction would damage our external internal credit’s worthiness is essential, briefly, the long view of .subsequent effects must bo considered, and the pros and cons examined before any precipitate action is finally taken. New Zealand is a country that is in the process of development and in order that productive (.note the word) and necessary public works may bo carried out, the present and successive Governments will .need to borrow moneys if progress is to be made, but- it is not to be implied that loans should be raised for unproductive undertakings and for those that may be many years ahead of legitimate requirements, Loan money already expended on unproductive enterprises is impending our progress, and, if persisted in, will end in disaster, to say nothing of the heavy interest bill that, with nothing to meet it but prohibitive taxation, will bo handed down to posterity to pay the best way they can. Payment of interest on loans spent on barren undertakings may be possible and posterity may have no alternative except default, but, of course, New Zealand will meet its obligations if the finances of the Government are properly managed and loan moneys are expended in productive channels, where earnings will be such, that payments of interest charges, after a reasonable time, will be assured and the burden of taxation minimised accordingly. There is no question that, if a reducton of interest on unmatured Government loans is legalised, by coercive or so-called voluntary methods, the successful flotation of internal or external loans will be prejudiced and highly prize, will be detrimentally afthe Dominion’s credit, which we so fected in London, where we must, at all costs, preserve the confidence that is displayed in us. The question of reduction of interest on current internal loans will now be receiving the consideration of the Government, but there has been no suggestion that external loans should be subject to similar treatment but once the principle is admitted, London investorwould naturally lie loath to invest their funds in a country that regards the sanctity of contracts lightly, as they may reasonably think tnat their turn may be next. London will not look with equanimity upon any interference with contracts of the nature under discussion, and for the reason that no one is a prophet in his own country, it is suggested that the Government should, if it has not already done so, secure independent and authoritative advice from London before it embarks upon any policy that may, in the long run, have adverse influences upon our credit there. The suggestion is made after due consideration, as it is feared that, if interest on current internal loans is reduced, there will he repercussive effects when the need for again borrowing on the London market arises. The London money market regards us as credit worthy in a high degree. Once our credit is damaged our bonds will not be in such good demand, and although we may subsequently repent of our ill-advised actions, that will not repair the breach or assist us to rehabilitate ourselves in the eyes of prospective lenders whose surplus funds we could use to advantage, If interest rates on current internal Government loans are reduced we shall nay dearly for our lack of tore,fight and adoption of dangerous expediencies. The slightest alienation >f our existing good relationships with London would he to our inevitable disadvantage and would do immeasurable harm to us, a s the maintenance of our credit, there is highly important for our prcisen- and future wellbe ng. The favourable comments made in London in respect of our determination to prevent further currency deoreciation by raising the rate of exchange on London, should emphatically indicate to us that London would, for various reasons, he concerned il any steps are taken to reduce interest on current internal Government loan*. London opinion should therefore he obtained at once on the long-run el-L-cts of the adoption of a measure that would provide for a legalised reduction of interest rate on current internal Government loans, as we must sedulously avoid any proceedings that may close the door of London as a market where we are usually able to obtain funds for reasonable productive purposes. We must not forget that the local market cannot supply uwith all of our legitimate requirements.