Evening Post THURSDAY, AUGUST 3, 1939. LOANS AND LONDON

Evening Post, Volume CXXVIII, Issue 29, 3 August 1939, Page 8

Evening Post THURSDAY, AUGUST 3, 1939. LOANS AND LONDON

By the Budget the Government has committed itself to very heavy borrowing in New Zealand. Last year £16,748,986 was borrowed and £2,980,056 was redeemed, leaving a net addition of £13,768,930 to the Public Debt. This year the loan programme includes £19,062,000 for public works, a minimum of £3,000,000 for housing, possibly £2,000,000 debit in the Dairy Industry Account, and perhaps £1,172,000 sterling (about £1,465,000 in New Zealand currency) being the balance of the maturing London loan held by New Zealand institutions. Altogether between £25,000,000 and £26,000,000 loan funds may be used. Against this may be set the £4,500,000 internal loan recently raised, and £5,000,000 sterling British export credits (£6,230,000 in New Zealand), all of which will not be available to meet the loan programme. Allowance may also be made for the fact that the dairy industry deficit already figures in the Reserve Bank advances, and that arrangements may be made for New Zealand institutions to convert their holding in the London loan without recourse to the loan market. Even making these allowances, however, there is a big gap to be bridged— possibly £12,000,000 or £13,000,000.

This is not the full commitment. By its London conversion loan prospectus the Government undertakes to provide for redemption by "making available in London, out of funds accruing from exports from the Dominion or ■ otherwise, sufficient sterling to repay the whole of this issue by January 1, 1945, by halfyearly instalments of £1,000,000 during 1940 and £1,750,000 thereafter, payable on or before June 30 and December 31 in each year."

This means that the Government must obtain sterling over and above requirements for debt service, repayment of export credits, and purchase of imports to the amount of £2,000,000 in 1940-41, and £3,500,000 for each of four years thereafter. To obtain the sterling will be difficult enough, but there is another part of the operation. Holders of sterling funds must be paid in New Zealand, either from revenue surpluses, or from loans. So that the redemption of £2,000,000 sterling debt in 1949-41 involves borrowing (or taxing, which is obviously impossible now) to secure £2,500,000 in the Dominion. The next year about £4,377,000 will have to be borrowed.

There is a possible way of escape in the prospectus terms as set out in the Budget. It is provided that during periods from June 5 to June 20 and December 5 to 20 in each year, commencing in 1940, holders of stock will have the option of converting into one-half each of 3^ per cent, stock maturing in 1949-54 and 1955-60. That is to say, the shortterm stock may be exchanged for stock having 10-15, 15-20 years' currency. The conversion is to be "at rates to be published from time to time," and "to the extent that these options are exercised in any halfyear the obligation to redeem in that half-year will be reduced." This permits the Government to offer terms of conversion such as will induce the holders to accept long-term stock instead of sterling. Jhus the amount of sterling to be fdtmd may be lightened. But the option is an option exercisable by the stockholders. The Government may persuade, but cannot compel, them to take advantage of it. They probably will take advantage of it to some extent on reasonable terms if New Zealand's credit is re-established. Improvement of credit means ability to pay. Therefore, to avoid having to provide sterling, the Dominion must make certain that it can be furnished if called for. The same rule applies here as in private loan transactions. A mortgagor has no difficulty in renewing if he is able to put down cash if the mortgagee asks him to do so. Similarly, New Zealand will obtain favourable terms if ability to fulfil the contract is demonstrated.

This supplies the strongest reason' for curtailing demands on loanable money and credit issues in NeAv Zealand and doing it noAv. There is, as Aye have shoAvn, a big gap between the proposed loan expenditure and the loan money so far obtained. The temptation to keep to the programme and fill the gap by credit issues is presented. But, as the Reserve Bank has pointed out most clearly, this Avill involve inflation Avhen London reserves are virtually exhausted. It will further increase the difficulty of borroAving in New Zealand to redeem London debt and will intensify the pressure on sterling. Thus, New Zealand may be compelled, at whatever inconvenience, to find the sterling

for redemption. This will enforce the economy which the Government is now striving by all means to avoid. The Budget contains frank admission of the inflationary danger, but it does nothing to avert it. It would be immeasurably more

prudent to practise economy now than to have it forced upon us w Tith much greater severity a~ year hence.