Something borrowed, something new

New Zealand seeks better debt blend: The New Zealand Debt Management Office is borrowing extra money now to have a better blend of long-term debt and lower borrowing costs in the future, treasurer Phil Combes says.

Some of the borrowing is being placed in an on-call account with the Reserve Bank to be used to pay off about $8 billion of bond debt which rolled over on November 15, he said.

Those bonds were issued in 1999 and came to maturity this year, 12 years later.
"We are borrowing ahead ready to fund that debt maturity," Mr Combes said.

"We have been issuing that particular debt for a long time. "At times, it was at higher interest rates than they are today." The Government has been under fire this week with claims from Labour deputy leader Annette King and the Council of Trade

Unions for borrowing more than it needs to service current liabilities. Finance Minister Bill English said the Government was borrowing an extra $5 billion this year to take advantage of good interest rates.

Mr Combes said the debt office was issuing bonds - government debt - for the next eight to 10 years that would fall due between 2019 and 2021.

Borrowing had increased in the past three or four months as interest rates had become favourable.

"We are locking in interest rates for those eight to 10 years, giving us a benefit for that period of time. That's the dominant thinking in my mind."Saving 1% in interest on a $7.6 billion debt over eight to 10 years is a significant saving. That's what people are overlooking," he said.

Craigs Investment Partners broker Peter McIntyre said the debt office was "topping up" while it could.

The interest rate environment was benign and there was unlikely to be much movement before the first quarter of next year.

The old adage was that when interest rates were low, you borrowed as much as you could for as long as you could. When rates were high, you borrowed as little as you could for as short as you could, Mr McIntyre said.

There was high demand in the world for New Zealand government debt and the debt management office was taking advantage of the country's strong fiscal position in a global market.

"This is something we should be pleased about as it lowers the cost of government debt servicing," he said.

Mr English said that throughout last year, the Government had borrowed around $300 million a week and was borrowing more now.

"We've been quite open about the fact that we have been borrowing more than we need, particularly over the last three or four months, when the conditions have been favourable."

From July onwards, new borrowing would drop down to $100 million a week on average over the next three years, he said.

Mr Combes said the debt management office had a mix of options available to it when it borrowed.

Apart from the on-call account with the Reserve Bank, the office had the ability to invest by drawing down cash and buying securities in other markets.

The office bought five-year bonds, for instance, in a lot of banks, including some super-national debt through the World Bank.

"We look for very high credit rating and don't go past AA. In the past we have bought other sovereign debt provided the credit rating is high enough.

"We need a very high credit rating and be confident we will get our money back," he said.

New Zealand had not bought any debt from the PIIGS (Portugal, Ireland, Italy, Greece and Spain), Mr Combes hastened to add.

Originally Published by The Otago Times, By Dene Mackenzie on 11 Jun 2011