INTEREST ON LOANS

Otago Daily Times, Issue 22058, 14 September 1933, Page 9

INTEREST ON LOANS

SOUTHLAND POWER BOARD PAYMENT IN NEW ZEALAND CURRENCY COMMENT BY MR COATES (Special to Daily Times.) WELLINGTON, September 13. Commenting on the decision of the Southland Electric Power Board to. pay interest on its London loans on September 15 in New Zealand currency, the Acting Prime Minister {Mr J. G. Coates) stated that, if the Power Board did not pay, the Government, in the national interests would do so. Legislation would then be introduced during the coming session of Parliament by which the Government would reimburse itself of the amounts so paid. Mr Coates stated that he had been in constant communication with the board in regard to the whole question of its London interest, and had in fact met a representative deputation of the board in Wellington a short time ago. The Minister mentioned that the Government had been in close touch with London authorities in regard 1 to the original proposal of the board to take a test case in London with a view to obtaining a decision as to the applicability of the Broken Hill judgment upon which the board’s legal advisers base their contention that the board would be acting within its legal rights in effecting the payment of interest in New Zealand currency. In the report of the meeting it was stated that Mr Coates had advised the board to take steps to apply for a test case in London, and when asked for his comments on this aspect of the proceedings the Minister indicated that this was hardly a correct interpretation of the earlier proceedings. “T may say,” continued Mr Coates, “ that representatives of the Power Board waited on me on April 27 last and made reference to the Broken Hill judgment, and to the legal advice which had been obtained by the board. 1 indicated to the deputation that I could not possibly agree to have anything tacked on to that judgment, but that I concurred that the board should have the matter tested out in the courts in England. I definitely stated that the Government would not associate itself with any movement to take advantage of the Broken Hill judgment, and mentioned that there were bigger principles involved by reason of the fa'ct that the Power Board’s loan was a State-guaranteed loan, and concluded by saying that just how far the Government could say it was prepared to stand out of the way until a test case was taken was another story. This was practically the first reference to the matter, and even at that early date I took the precaution of laying it down that the Government might not be able to take a passive attitude in the whole matter. Again in June last in the course of a letter to the board I referred to the previous suggestion that the board might take a test case in London to clear up the legal position, and pointed out to the board that nothing should be done which would be likely detrimentally to affect the credit of other local bodies and the Dominion itself, and that it was very desirable that payment of interest in London should continue to be made in English currency until it had been definitely decided by the English courts that the debenture holders are not entitled to be paid in English currency. The present decision of the board, of which I have just been advised, is that the board will pay in New Zealand currency, and will leave it to the bondholders to have the position tested. I have already mentioned that the Government has been in close touch with the London authorities and with the Prime Minister when he was in London in regard to the whole position, and the advice received from London from the highest authorities available to the Government was to the effect that the Southland Power Board would be very ill-advised to continue with its previous proposal to take a test case. The debentures issued by the board give to it the option to refinance in 1936, and it will be at once apparent that any action which the board takes now may very seriously prejudice its position in 1936 when the time conies for it to refinance, and I have repeatedly drawn the attention of the board to the advice received from London in regard to this aspect. Notwithstanding the indications which the Government previously had that any proposal of the board to take a test case would react to its detriment, and notwithstanding the ad-< vice which the board had received itself that there was no prospect of conversion before 1936, at the urgent request of the board I agreed to make representations to the London authorities with a view either to an interest rebate on the present rates until 1936, or alternatively to conversion now in the form of a redemption loan at a lower interest rate, and in my communication to London I made special mention of the difficulties facing the board and did my utmost to impress upon London that the board may have some rights under the Broken Hill judgment which would justify the bondholders in meeting the board in the manner suggested. "No one regrets more than I do, added Mr Coates, “that the reply received from London was definitely unfavourable to both proposals put forward, and the chairman of the Power Board was so informed on the Bth inst. The London advice received by the Government was unprejudiced advice, and came from sources which the Government cannot possibly ignore, and I explained to the chairman that I could see no course open but for the board to continue the payment of interest in full in sterling. “ In the press report of the board’s meeting it was stated that the Government had refused the board the advantage of the temporary financial arrangement in London which was assured. I take strong-exception to this statement,” continued Mr Coates, “for in the letter which I sent to the chairman on the 6th of this month I traversed the suggestion made by the board that it should obtain accommodation from a financial house in London, and added that from information obtained by the Government on the subject I was very doubtful whether the board would meet with success in its efforts in this direction, but that if it should succeed in obtaining accommodation in London on a basis acceptable to the Government I would be glad to facilitate any such arrangements. It had previously .been announced both by the Prime Minister in London and by myself in New Zealand that the Government is of the opinion that there are moral obligations on every local authority which has raised loans in London in terms of the London prospectus to arrange the payment of interest in London in sterling, and announcements both in London and in New Zealand were to the effect that if there was any doubt about the legality of local authorities paying in sterling the Government would introduce legislation validating such a course.

“ Notwithstand the legal advice obtained by the Southland Power Board I feel bound to say,” continued Mr Coates, “ that the legal issue is not free from doubt as witness the fact that the judgment in the Broken Hill ease was not a unanimous judgment. The moral issues are, however, in the opinion of the Government, perfectly clear, and there can be no argument but that, having borrowed in the currency of the United Kingdom, and having covenanted

to pay interest in London, any local authority is morally bound to honour its obligations. It has been pointed out to the Southland Power Board that if the interests of that board alone were at stake the Government would not be concerned to the extent that it now is. The Government has obligations to meet in London and so have other local bodies, and one local body has already been shut off the London market and prevented from raising renewal loans in London to meet loans maturing on August 1, 1933. Fortunately the local authority concerned was able to obtain accommodation from its bankers to enable it to meet its obligations in respect of the maturing loans, but it can hardly be expected that bankers can finance all the loans which will mature in London from time to time. For instance, two local authorities have to finance approximately £1,000,000 on January 1, 1934, and there are loans maturing from time to time. With these issues at stake the Government cannot look with any degree of equanimity upon the position which has been created as a result of the decision of the Southland Power Board, and the argument of the board that as the matter is a national one the Government should pay the excess cost to the board is quite fallacious. The board no less than any other local authority of New Zealand or the Government itself is vitally concerned with the reactions of the London money market, as witness the option which it holds to refinance in 1936. I cannot help feeling that the board is mistaking the shadow for the substance, and for the sake of the small amount qf gain which it hopes to obtain it is apparently willing to forgo the greater benefit which it could reasonably expect by successfully converting in 1936.” Questioned as to the action which the Government will take if the board adheres to the resolution Mr Coates emphatically stated that the Government would issue instructions for the payment in London of the difference required to enable the bondholders to be paid in sterling, and that legislation would be introduced during the forthcoming session whereby the Government would obtain from the Southland Electric' Power Board reimbursement of the amounts so paid. Mr Coates concluded by saying that he had made it quite clear to the Power Board that nothing short of payment in sterling in London would meet the position, and that if the Southland Power Board did not pay the Government would in the national interest do so, “ The Government is jealous that the reputation which it has hitherto held in London for fair and honourable dealing should not be lost as the result of the hasty action of one local authority,” said Mr Coates. The Government is satisfied that when the board originally obtained a Government guarantee and raised its loans in London the intention was that payments should be made in sterling and * the board for many years has in fact confirmed this intention.” CHRISTCHURCH CITY LOANS PAYMENT IN STERLING. (Per United Press Association.) CHRISTCHURCH, September 13. The Mayor of Christchurch (Mr D. G. Sullivan) stated to-day that the City Council had decided that the council should pay exchange on the interest due in London; in other words, that the payments would be made in sterling. The council had also come to the decision at its last meeting in committee in favour of the conversion of loans raised overseas and the Finance Committee was instructed to make the necessary representations to the Government to give effect to this decision. FINANCIAL TIMES COMMENT (United Press Association ) (By Electric Telegraph—Copyright.) LONDON, September 13. (Received Sept. 13, at 9 p.m.) The Financial Times says: “The announcement that the Southland bonds will be paid in New Zealand currencyis bewildering, as Mr Forbes said that there was a moral obligation to pay in sterling; therefore it appears to be for the Government to see that bondholders are paid what is due. The statement about a test case does not put the matter in a better light, as those who lent the money do not wish to have to sue for their rights. The next move seems to be with the New Zealand Government.”