Wellington, Nov 2 NZPA - Both Labour Party leader Helen Clark and National Party leader John Key say the bank guarantee scheme announced yesterday will help underpin economic certainty in uncertain times.
Finance Minister Michael Cullen announced the details of a bank guarantee scheme on Saturday.
Dr Cullen hoped it would stop the financial system running out of cash.
He also announced a deal with banks to take it easy on mortgage customers hit by the recession.
The Government is offering a wholesale funding guarantee facility to investment-grade financial institutions in New Zealand.
It has already offered a guarantee of up to $1 million for retail deposits to stop worried customer pulling their money out.
The wholesale scheme is designed to apply to individual securities issues and with a graduated fee premium schedule which gets more expensive for banks with low credit ratings and the longer the guarantee is intended to apply for.
It has been estimated the total liability could be up to $450 billion, if banks chose to cover all their funding.
The fee follows other countries offering such guarantees to ensure that the cash flow to banks did not dry up.
New Zealand's scheme is notable in that the premium being charged is higher than that being charged in Australia.
Since New Zealand's major banks are mainly owned in Australia, these means their parent companies are likely to take advantage of the Australian guarantee and on-led to their subsidiaries to take advantage of cheaper credit.
Dr Cullen also said he had exchanged letters with the major mortgage banks about how they would handle mortgage customers who were temporarily unable to meet their payments times ahead.
The banks have indicated that where mortgage-servicing could be resumed within a reasonable period, they would work with borrowers to avoid forced sales.
They had a variety of ways of doing this such as by capitalising interest or temporarily reducing mortgage payments in order to help borrowers get back on their feet again after experiencing a financial shock.
Miss Clark said the moves would underpin the stability of New Zealand's financial system and provide security for New Zealanders.
Mr Key also welcomed the move to shore up the economy.
"The wholesale guarantee was a necessary extension to the banking guarantee programme given the moves taken by others."
Mr Key also welcomed the assurances offered by trading banks that they would show compassion for New Zealanders who found themselves in tough times.
"My expectation is that in light of the Government guarantee to banks, banks themselves will be very careful about the manner in which they deal with customers who may, as a consequence of the global financial crisis, find it hard to meet their obligations."
There had been fears that banks based in New Zealand would have cash dry up as overseas investors stayed clear of any bank that did not have a Government guarantee.
The facility would be available to financial institutions that had an investment grade credit rating and have substantial New Zealand borrowing and lending operations.
The facility will operate on an opt-in basis, by institution and by instrument.
A guarantee fee depend on the credit rating of the issuer and the term of the guarantee.
Other Government's have sought equity in the banks they are guaranteeing, but Dr Cullen said that was not necessary in New Zealand.
In those cases the banks had needed to be recapitalised and no one in the private sector was willing to do it.
The banking sector in New Zealand was fundamentally sound, he said.
The problems was that without the guarantee there were fears that the banks access to cash would dry up.
Without that cash, banks would step lending and the economy could grind to a halt.
Dr Cullen said the scheme was a "necessary evil".
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