PUBLIC BODIES’ LOANS

Otago Daily Times, Issue 21993, 30 June 1933, Page 4

PUBLIC BODIES’ LOANS

THE PROPOSED CONVERSION AMENDING LEGISLATION SUGGESTED At the call-over on the Dunedin Stock Exchange yesterday afternoon the chairman (Mr Harman Reeves) said he wished to refer to recent legislation known as Local Authorities’ Interest Reduction Loans Conversion Act, 1932-1933. There were, he Said, certain provisions in that Act that wore a menace and a blow at the very foundation of finance, as it affected lending to public bodies by institutions and individuals outside New Zealand and in the Dominion. For many years past public bodies in New Zealand, such as cities, harbour boards, boroughs, counties, etc., had raised loans in the Dominion and outside New Zealand from Australian and London lenders at certain rates of interest and for a fixed term. Owing to the economic conditions prevailing throughout the world, the New Zealand Government, like the Governments of other countries, had found it necessary to pass Acts of Parliament to reduce the rates of interest on existing loans. Whilst it was contrary to the best British traditions to countenance any breach of a contract once_ honourably entered into, it had been generally accepted and agreed that in the extraordinary circumstances of the world s economic position a compulsory reduction of interest on Government loans was imperative and absolutely necessary in the interests of the country. “ We reluctantly accept that,” said Mr Reeves. “ but what I think we are justified in raising strong objection to is the powers contained in some of the clauses in the Act referred to —rpowers that are all in favour of the borrower and to the great disadvantage of the lender. Section 13, subsection B, states that the Governor-General-in-Council may make such provisions as he thinks fit with respect to the nature, form, and denominations of the new securities or of any class or classes thereof and the terras-and conditions of maturity and rate of interest, payment of principal and interest, etc. “The‘recent conversion of Government loans was effected on a basis of 4 per cent., and the conversion was admittedly a great success, and the stock exchanges throughout the Dominion voluntarily assisted very materially in that success, but the proposed conversion of local bodies’ loans is on quite a different footing, for the following reasons: —Lenders can be forced to convert without appeal, or if they dissent from conversion their interest is to be reduced 33 1-3 per cent. Then the Loans Board, subject to the approval of the local authorities and the Governor-General-in-Council, under part two of the Act, can decide the maturity date and the rate of interest on any loans that are in existence at the present time. This is all in favour of the borrower, and a distinct breach of contract. Many lenders want their loans paid off on the date fixed, even if in the meantime the interest is reduced, but, under section two of the Act, the Loans Board can extend the loan to any date it likes. Is this fair to the lender? Should not the date of maturity be that at which it was originally fixed? “In Victoria, by agreement between the tiorrower and the lender, a loan may be extended for a period not exceeding 10 years, but no loan under the conversion scheme has exceeded five years. In New South Wales there has been no legislation extending the term of a local body loan. The late New South Wales Government, with all its faults, did not go so far as the Government of this country has in passing clause 2 of this Act. The Loans Board has invited all local bodies to take this opportunity of arranging long-term finance, and has even suggested that the Goveruor-General-in-Couneil may agree to change the domicile. As show-' ing the injustice and unfairness of that part of the Act referring to the currency of a loan, I quote the following:— A certain institution in Australia many years ago lent a small borough council money at 5 per cent, which matures in two years’ time. In the ordinary course this loan on maturity would be paid oft, and the lenders would be able to reinvest their money elsewhere on a better security, but under the Act the little borough will be able to take advantage ot the position and apply for an extension of the loan at the reduced Tate of interest for another 20 or more years, and the lender is forced to agree as he has no recourse nor can he appeal. The borrower is the only person who apparently counts in this transaction. The Loans Board may extend a loan that has less thai) a year to l run to a term of 25 jears, r ~ . “ The Local Government Loans Board in its circular letter of May 11 states: ' The main object of the legislation was to effect a readjustment of interest rates on all existing securities by the establishment of standard rates to which future borrowings will naturally conform.’ “Whilst :t may be possible to have a standard rate of interest for Government loans, it will be absolutely impossible to have a standard rate of interest for public bodies’ loans. For instance, is it to be supnosed that the Borough of Green Island can in future borrow at the same rate of interest as the city of Dunedin, or that the security to the lender is as good as that of Dunedin? Small boroughs in the past have been able to raise loans only by offering i per cent, to 1 per cent, more than the larger and wealthier public bodies. They would have no chance whatever in the future Oi raising loans if the rate is to be fixed at, say, 4-i per cent., the same as a city loan. “It must not be forgotten that the price of money, like any other commodity, i- based on demand and supply, and that rates of interest will vary according to the supply of money and the security offered. The present repudiation of interest rates is only countenanced and permitted owing to the extreme economic conditions ruling the world over, but there can be no excuse for the public bodies ot this Dominion seizing the opportunity to interfere with the currency dates oi existing loans, and I think the stock exchanges of the Dominion should advocate that amending legislation be introduced providing tor a 20 per cent, reduction, subject to the minimum rate of 44 per cent., and allowing no interference with dates of maturity or place oi payment, but if Parliament decides to grant extensions, such should be limited to five years.”