Mr Nash’s Mission

Press, Volume LXXII, Issue 21938, 12 November 1936, Page 12

Mr Nash’s Mission

It is interesting to observe that the Minister for Finance, in a doorstep interview in London, mainly on marketing questions, was careful to introduce a smooth word of reassurance about the Dominion’s liabilities. He said that the service of the oversea debt would be the first charge on credits derived from the sale of commodities and that, while he would visit the London financiers, he would not be “ demanding “conversion.” Unquestionably British opinion was alarmed by the Prime Minister’s indiscreetly phrased statement, a few months ago, and not fully satisfied by the explanation which followed but rather smudged his meaning than clarified it; and Mr Nash’s remark will be beneficial. Even ‘in the missionary’s own country it is something of a relief to hear him reported as acknowledging so plainly that new credits must sustain old pledges as well as fresh bargains, and rejecting just as plainly the impossible errand of “ demanding ” the conversion of loans. It is a relief, particularly, because in many official and semi-official statements the Dominion’s status as borrower and the simple facts.about a true conversion operation have been erroneously interpreted, by suggestion at least. It would not, for example, be a normal conversion proposal if the Dominion invited bondholders to convert at a lower rate before the optional date of repayment; and the proposal could not be made without reflecting on the Dominion’s solvency. It would, in effect, be the same as a debtor’s attempting a composition with his creditors and subject to the same difficulty and danger. Conversion can properly be proposed only when the contract term is fulfilled and the debtor government offers either a new contract or repayment under the terms of the old. That the Labour party has held different views is certainly true, and it may still hold them; but Mr Nash will not make the blunder of acting on them. This does not mean, however, that the Dominion is necessarily helpless in the matter, or has no resource but to wait for optional maturity dates and act then. For instance, the financial writer of the “ New “ Statesman,” some months ago, in an article as sympathetic with the Government’s aims as it was severe on its economics, put forward a sug-

gestion which shows a bud of usefulness. He observed that New Zealand loans at rates higher than those current stood at a premium which reduced the earning value to the standard; thus, 5 per cent., stock redeemable in 1946 stood at 112 at the end of June, a price at which

the gross redemption yield was £3 10s per cent. The loss of £l2 on redemption in 10 years is expected to be amortised out of the annual interest of £ 5 per cent. But in fact “ the huge “ body of income-tax payers receive not £ 5 but “ £3 16s 3d* each year after deduction of in- “ come tax . . . [so that] the true net yield to “such holders works out at £2 8s per cent.” It follows that it would pay them, and therefore please them, to exchange their 5 per cent, stock for “a 3 per cent, stock redeemable in 1946 at “a price of, say, 98i to give net redemption “yield of £2 9s per cent.” The figures are merely illustrative of a general argument that, on such conditions, the debtor could offer his creditor a new contract, before the expiry of the old, without falsifying his position; for the new terms would be to the advantage of both, not merely to the advantage of the debtor. A table of loans was then set out, of stocks redeemable between 1943 and 1949' and bearing interest at 4 per cent, or more, to show the budgetary gain to New Zealand, which was worked out at £910,000. But there are certain questions which “ Toreador ” did not answer. The Government would not be dealing with investors choosing between “ a 3 per cent, redeemable “ stock at a discount ” and “ a 5 per cent, stock “ redeemable in, say, 10 years’ time, which “ stands at a heavy premium it would be dealing with actual bondholders, whose stock might have been purchased at par, or at a slight premium, or even at a discount, as well as at the “ heavy premium and what, then, becomes of the “ certain loss of 12 points ” which is to be amortised out of the interest, and which is the pin of the argument? What remteins, when the suggestion is tested, is the possibility of a proposal, or series of proposals, so framed as to offer bondholders, according to the term and price of their investment, a better redemption yield than their holding promises them, though at less cost to the Dominion. It is a possibility that will not stretch so wide as “Toreador’s ” £910,000 a year; but it is not inconsistent with normal conversion, at due dates, and investigation might show that the one process might supplement the other and assist it by an earlier, partial respreading of the loan and interest burden.