Cullen reveals Reserve Bank rescue figures

By BRIAN FALLOW, economics editor

Finance Minister Michael Cullen yesterday put numbers to some of the increase in financial firepower the Reserve Bank wants.

It is seeking Parliament's blessing to borrow $1.9 billion in foreign currencies to boost to around $7 billion the reserves it maintains so it can step into the foreign exchange market in emergencies.

These reserves are insurance against the possibility of the market becoming extremely disorderly or dysfunctional - in effect, if no-one else is prepared to buy New Zealand dollars.

It has long been the Reserve Bank's policy to intervene in such circumstances, although it has not had to since the dollar floated nearly 20 years ago.

The reserves it has for that purpose are at levels set in the 1980s.

Increasing those reserves is expected to be spread over three or four years and done in ways such as borrowing in foreign currencies which will not affect the exchange rate.

On top of that, and more controversially, the bank wants enough money to intervene in the market to shave the tops and bottoms off the exchange-rate cycle.

Dr Cullen and the Cabinet have been told how much that might mean in extra borrowing, but it remains in the blank cheque category to Parliament and the rest of the world.

Estimates have been blanked out of the background documents issued by the Treasury and Reserve Bank yesterday.

But Cullen is asking Parliament to put an extra $1 billion into the bank's balance sheet, on top of the $400 million it already has, to boost its ability to ride out unrealised losses on its foreign exchange exposure.

Its foreign exchange position will be marked to market and disclosed monthly.

Cullen said all parties in the House except National and Act would support these measures.

Reserve Bank Governor Alan Bollard has sought cross-party support for the intervention policy, lest its credibility be undermined by the risk that a change of Government would lead to a policy u-turn that turned paper losses into real ones.

National's associate finance spokesman, John Key, said National recognised it would be irresponsible to make such a u-turn, even if it did not agree with the policy.

Paper losses would arise if, when the bank's foreign currency reserves were revalued monthly at market rates, they were worth less than it had paid for them.

"We accept that the Parliamentary cycle is potentially far shorter than the five to seven years of the exchange-rate cycle," Key said.

"We wouldn't cut off our nose to spite our face.

"You may object to a motorway, but that does not mean that once the asphalt is down you rip it up."