"AN ORGY OF BORROWING"

Evening Post, Volume CXIV, Issue 27, 1 August 1932, Page 6

"AN ORGY OF BORROWING"

Points concerning local body finance have been raised by Mr. Justice Ostler's remarks on the Thames Borough Council case which call for attention by the Government. When the Thames Borough Commissioner Bill was before the House of Representatives last session it was dealt with .purely as a local measure (though the Bill was a public Bill), and there was no debate on tha general principles involved in the insolvency of a local body. These principles, however, are of great importance to the credit of New Zealand and Dominion local bodies. As pointed out by his Honour, the borough in 1921 had a debt of about £14 for every £100 of-unimproved

value. In 1932, owing to the fall in values and the rise in the debt, the borough and Harbour Board debts were £200 for every £100 of unimproved value. It will be a damaging blow to local body creditif it be known that this has happened and that there is no check to prevent it occurring in'- other cases. New Zealand has noAva Local Bodies' Loans Board, which investigates applications for permission to raise loans. Much.of the Thames debt was, no doubt, incurred before the Board was in'being, but information should be given as to whether that Board assented to any. of the loans, and, if so, how it came to do so. Otherwise the efficacy of this safeguard will be doubted. , , ■ . . '' ; A further point calling for.explanation is that to which his Honour drew attention when he stated that investors in subsequent loans ra"nked pari passu with investors in earlier loans. /They were not like second mortgagees; although later in time they" had the same rights as the investors in the earliest loans, and consequently the security of a local body loan was1 liable to be impaired by subsequent borrowing by that local body. In other words, the investor may. put his money into a loan which is good at the time, and .find later that-it has been knocked to pieces by later borrowing. Admittedly there is no easy remedy for this. It is a rislc which all investors in public securities must take. But consideration. should be given to the question of mitigating that risk. If priority were given to earlier lenders, later lenders would at least know where they stood. Moreover, a focal body's borrowing would be checked by inability to borrow if it had a huge prior debt. This would not be wholly undesirable.