THE New Zealand Herald AND DAILY SOUTHERN CROSS FRIDAY, JULY 29, 1932 POSSIBLE LOAN CONVERSION

New Zealand Herald, Volume LXIX, Issue 21247, 29 July 1932, Page 8

THE New Zealand Herald AND DAILY SOUTHERN CROSS FRIDAY, JULY 29, 1932 POSSIBLE LOAN CONVERSION

Reports from Ottawa state that Mr. Coates has suggested that Britain's successful conversion operations, affecting the 5 per cent war debt totalling £2,000,000,000, creates a prospect of having the interest on New Zealand's funded war debt reduced correspondingly. It is indicated that the subject will be broached with Mr. Neville Chamberlain, the Chancellor of the Exchequer, who is a member of the British delegation at Ottawa. The underlying idea is that as Britain has substantially reduced the interest charge on her war debt, being in the process of converting it to a 3| per cent basis, New Zealand may be conceded a similar rate on her obligations. This funded war loan is a debt between Governments, and, therefore, is not out of court as a subject for such discussion. Britain has made concessions of a much more substantial character than that mooted to other debtors, notably France and Italy. At the same time it must be clearly understood that in each instance it was purely an act of grace. No debtor had the right to demand concessions. New Zealand has no such right. If Britain decided to stand by the letter of the contract solemnly made in 1922, this country would have no legitimate ground of protest. Moreover, if to-day it were shown that a concession would add a load to the British Budget, there would be no moral right to ask it; for the British taxpayer bears a heavier burden than the New Zealander, and his need of relief is greater. With these points clearly understood, the question of a rearrangement of terms is still possible as a subject for discussion. When the funding arrangement was made in 1922, New Zealand owed the British Government £27,532,164, all but £1,191,920 of the amount being directly on account of war expenditure. The debt was funded on a 6 per cent annuity basis. New Zealand undertook to pay £1,651,930 a year, in two equal halfyearly instalments, until December 1, 1958, when the whole amount will be repaid. The right to redeem the whole or any part of the debt at any time was also given. Interest is charged at a fraction under £4 19s 6d per cent, and each year the amount of principal * repayment increases. The process is identical with the perfectly familiar one of repaying a State Advances loan under a table mortgage. Reduction of the interest to 3| per cent would in effect mean a saving of almost l£ per cent on a steadily diminishing principal sum. The concession could be made by retaining the annuity at its present level and reducing the period of repayment. This would not have the effect of giving the Budget immediate relief, which is of course the motive in suggesting a reduction of interest. Therefore, a revision of the annuity basis would be necessary, and it is not possible to, show simply what the saving would be in the next few years. For the financial year 1930-31 £1,225,822 of the annuity represented interest. A reduction of the rate to 3$ per cent would have meant a saving of approximately £370,000 on the basis of the principal outstanding at the beginning of that year. Since the June instalment last year, payments have been suspended in consequence of the Hoover moratorium principle having been extended by Britain to the Dominions. The strict continuity of the instalments has already been interrupted, and the whole original terms of repayment varied. Readjustment of the table to an altered rate of interest would be A simple matter — if the British Government, with which the decision Ifes wholly, saw fit to agree to a reduction. Because conversion of the funded war debt to a lower rate of interest has been officially mentioned and can be considered as a possibility, it does not follow thai the question of converting the whole of the Dominion's debt can be considered in the same way. If New Zealand sought to redeem or convert any of the ordinary debt held in Britain it would mean asking the bondholders to vary the terms of their contract. There are no maturities of any moment for several years to come. Feeling in London financial circles is extremely hostile to the form of conversion Australia applied to her domestic debt, as comments on it have frequently shown. If New Zealand attempted to make any such proposal affecting the overseas debt, it would simply be inviting failure, and serious injury to the Dominion's credit. Therefore, the remaining part of the £154,547,000 of the public debt domiciled in London cannot oven be considered as a possible subject for conversion. As regards the domestic debt, the Government deliberately chose a special tax on interest in place of any attempt to reduce the rate, and. nothing has been done ito prove that a wholesale variation of contracts with bondholders would be preferable either morally or practically. Exaggerated ideaß about possible savings by conversion gain no support from official figures. The average interest paid on the whole public debt is just over 4| per cent. Of a total amount of £276,000,000 outstanding on March 31, 1931, 11 per cent, or some £30,225,000, paid interest at less than 4 per cent; £46,823,000, or 17 per cent, paid more than 5 per cent; while of the remaining 72 per cent, or £198,985,000, some £137,993,000 bore interest at 4 and 4?j per cent. Because Britain was able to convert the huge war loan to 3| per cent, it does not follow that New Zealand could reduce the interest on her public debt to a like figure. It is a mistake to over-estimate the benefits of conversion schemes even if practicable ; and the proposal to discuss the funded war debt makes wider 1 schemes no more practicable than they were before.