Debt Monetization Creeps Closer by the Day in New Zealand
(Bloomberg) -- The Reserve Bank of New Zealand is on course to own more than a quarter of the nation’s debt by next February, even if it doesn’t start direct monetization, according to Bloomberg calculations.
Governor Adrian Orr said Tuesday he remains open minded about buying the nation’s debt directly from the state, as the central bank mulls more policy responses to tackle the coronavirus crisis. The RBNZ has said it would purchase NZ$33 billion ($20 billion) of government bonds over a year in secondary markets.
The need for massive government spending to pull New Zealand’s economy through the coronavirus crisis, and a growing number of advocates for debt monetization around the world, make it a real possibility for the RBNZ. In the region, Indonesia has paved the way for the central bank to buy debt directly from the government, while the Reserve Bank of Australia has been at pains to emphasize that it is only buying bonds in the secondary market.
“Direct monetization, I know, has been heresy, taboo for a long time, but it’s only a long time in our lifetime,” Orr said. “It’s not a mysterious issue. It’s just not how we’ve run business.”
Orr was speaking at a web-based seminar where he went through a range of options, including negative rates, as the pandemic devastates economies globally. The central bank will be thinking about additional stimulus at its May review, while Prime Minister Jacinda Ardern’s government will also have to assess if it needs to borrow more, he said.
New Zealand’s Treasury has almost doubled debt issuance to NZ$25 billion for the fiscal year ending June 30. The RBNZ said last month that it would purchase as much as NZ$30 billion of bonds over the coming year, and on April 7 it added NZ$3 billion of local government funding agency debt to its program.
“We’re under no illusion that this is to help fund the government’s spending,” said Hamish Pepper, a fixed-income and currency strategist at Harbour Asset Management Ltd. in Wellington. “As long as you can trust the monetary authority to still behave in their mandate, then you can digest the idea of central banks buying debt from governments.”
Risks and Opportunities
In theory, direct purchases risk sparking uncontrollable government spending, runaway inflation and a slump in bonds and the currency.
Yet New Zealand’s bonds have returned more than 6%, including currency gains, since the RBNZ announced bond purchase program on March 23. The nation’s currency slipped 1.3% against the greenback on Tuesday after Orr’s speech. The yield on the April 2029 bonds dropped 2 basis points to 0.91% on Wednesday.
Direct debt monetization comes with “as many risks as opportunities,” said Orr, as he talked about the potential for high inflation if a central bank isn’t independent. “There’s no free lunch, but you shouldn’t rule any option out,” he added.
The RBNZ’s support for the bond market comes as foreign investors cut back their positions. Their ownership of New Zealand government securities fell to 49.9% last month, the lowest in 17 years, data showed on Tuesday. It was as high as 70% in 2015.
Orr’s willingness to keep all options open contrast with his peers in Australia, which have also started buying sovereign bonds to cap borrowing costs. Reserve Bank of Australia Governor Philip Lowe argued in a speech on Tuesday that the nation’s government will be able to finance itself without the central bank’s direct purchases.
Note: Bloomberg’s calculation that the RBNZ will own 27% of government bonds assumes the central bank buys NZ$30 billion of debt by the end of February and that the Treasury sells NZ$25 billion of bonds in the fiscal year starting on July 1, the same amount as this fiscal year. The calculation excludes $3.3 billion worth of government bonds that the central bank already owned at the end of March 31, given they include debt with repurchase agreements to the market. The estimated ownership including these is 30%.
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