KEY POINTS:
The New Zealand Institute think-tank says the Government should be ready to invest in New Zealand business against a possible sudden stop in lending by banks.
Among its proposals is that the Government establish a special investment vehicle, a "New Zealand Growth Fund", to control state-owned enterprises and to invest in other strategic New Zealand businesses.
The institute sets out criteria for the Government to use in the event of having to directly finance business.
In a paper published yesterday, ahead of the Prime Minister's jobs summit on Friday, research director Benedikte Jensen acknowledged that the Australian parent banks of the major banks in New Zealand were "relatively well placed internationally".
But she said that as the recession deepened, negative cash flow would make businesses more reliant on bank financing just as they tightened their credit policies in the face of wholesale funding pressures.
"A key objective of Government policy at the present time should be to prevent a negative credit contraction spiral as, unchecked, this dynamic would have serious consequences for employment and the economy."
The risk of a sudden stop in lending was accentuated by the fact that so much of the external debt held by New Zealanders was short-term.
About 40 per cent was scheduled to mature within three months, and more than half was due to mature within a year.
"This means that New Zealand has around $61.6 billion in external debt maturing early in 2009 at a time when overseas debt markets are barely functioning and overseas investor sentiment has turned sharply against peripheral countries, including Australia and New Zealand."
The paper said the Government, as a short-term measure, could use its own balance sheet to invest "in a more aggressive manner" in strategic New Zealand companies.
The Government balance sheet contained more than $190 billion in assets, the largest of which were the New Zealand Superannuation Fund at $12.8 billion and the ACC portfolio at $10.4 billion. The financial assets of SOEs totalled $14 billion.
The paper proposes options such as SOEs directly investing or being partially floated to raise equity funding, and getting the NZ Super Fund to invest more in New Zealand.
It proposed a special New Zealand Growth Fund to invest in strategic New Zealand companies and to own and manage most of the state-owned enterprises for growth.
"It would have the ability to sell down stakes in SOEs to create a fighting fund able to be invested in New Zealand growth companies and asset classes."
The proposal, however, is inconsistent with National Party policy. During the election campaign, it pledged there would be no asset sales in the next three years, including partial floats.
But the proposal for more active domestic investment by the NZ Superannuation Fund is consistent with National's policy: it campaigned for the fund to invest 40 per cent of its money in New Zealand.
The NZ Institute paper says the Government should prepare an option for direct financing of New Zealand companies in the event that other financing channels are suddenly closed to them. It proposes the criteria include:
Companies, the loss of which would result in the greatest collapse in employment and ancillary industries, and a snowballing loss of activity.
All reasonable alternatives had been exhausted.
That owners bear some cost such as giving the Government minority shareholding for capital injection.
Prime Minister John Key last week raised the possibility of direct Government assistance to Fisher & Paykel.
But some resistance to this emerged, because it is moving to get much of its manufacturing done in cheaper labour markets overseas.
* Proposals
Direct Government financing under strict criteria.
Establish a wealth fund, the NZ Growth Fund, to back local companies.
Encourage NZ Superannuation Fund to invest in NZ companies.
Partial floats of SOEs to raise equity finance for investment.
Lower rate of taxation on savings and profits.
Increase the relative rate of taxation on land and property.
Consider making KiwiSaver compulsory.
