Finance Minister Bill English launched the Earthquake Kiwi Bond, “The Government is borrowing the bulk of that money in the short-term and the Earthquake Kiwi Bond provides a way for local investors to contribute and help reduce the amount New Zealand needs to borrow overseas.” Kiwi Bonds are issued by Her Majesty the Queen in right of New Zealand through the New Zealand Debt Management Office of the Treasury and have an Standard and Poor rating of AAA. The minimum amount that can be invested is NZD1,000 with a maximum of NZD500,000 in any one issue. New Zealand Government Kiwi Bonds are debt securities denominated in New Zealand dollars which initially had a fixed interest rate. The Bonds were issued in terms of Part 6 of the Public Finance Act 1989 whereby interest, principal and any money payable on the Bonds are a charge upon and payable out of the revenues of the Crown. The bonds will pay interest based on wholesale government bond rates, with the initial interest rate set at 4.0 per cent and it is stated that the money raised from the bonds will be used to offset the NZD 5.5 billion cost to the Government from the Canterbury earthquakes. (See http://www.beehive.govt.nz/release/earthquake-kiwi-bond-help-fund-recovery).
Thus far the New Zealand Government has raised NZD26.6 million towards the costs of rebuilding Christchurch through the Earthquake Kiwi Bond but investors are not getting much benefit for their support and on 24 May 2012 it was reported that the rate on the bond had dropped from 4 per cent to 2.75 per cent per annum since its launch. (See http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10807991).
Retail investment in government bonds is said to have declined in the past few years. The Government has said that it was not its intention to rely only on Earthquake Kiwi Bonds to pay for their share of the Christchurch earthquake costs. The Government borrows, as is required (as part of its broader borrowing programme), to meet the commitments to the rebuild of Christchurch of NZD5.5 billion. At the current rate of return on the bonds it will take about 200 years to raise sufficient funds to pay for the rebuilding of Christchurch. Hon Bill English stated that “the hold-ups and challenges in Christchurch are not to do with finance; they are actually to do with the complexity of resolving insurance issues”. Don’t we know it! (See http://www.parliament.nz/en-NZ/PB/Business/QOA/b/5/9/50HansQ_20120509_00000004-4-Earthquakes-Canterbury-and-Christchurch.htm)
In another bond story – in 2006 the major insurer AIG, in the US, was implicated in the manipulation of local government bond issues. At least USD 7 billion worth of “phantom bonds,” which were intended to aid the poor and supply computers to inner city schools, instead only benefited companies such as AIG. In one such “phantom bonds” case in Florida, an AIG unit conspired with other financial services firms to extract fees from a USD 220 million bond issue that was intended to promote affordable housing for low-income families. Unbeknown to the local government agency involved, AIG’s deal meant that the less money that actually went to affordable housing, the more money AIG and its fellow companies would make. AIG and its co-conspirators eventually took USD 12 million in fees. Not a penny went to the affordable housing. The deal also violated U.S. tax laws, which would eventually force AIG to settle with the IRS. AIG was involved in similar deals in Georgia, Oklahoma, and Tennessee. (William Selway, Martin Z. Braun and David Dietz, “Broken Promises, ” Bloomberg.com, October 4, 2006.)
Let’s hope the New Zealand Government is a little more transparent!
New Zealand, Government Kiwi Bonds, Investment statement dated 8 March 2012, for the purposes of the Securities Act 1978 https://www.directbroking.co.nz/DirectTrade/Downloads/Shared/KiwiBonds%20Investment%20Statement%20&%20Application%20Form.pdf?version=20121012