The New Zealand finance sector union Finsec has cried out in protest to ANZ, Westpac, BNZ and ASB banks paying out large dividends while allegedly making jobs redundant, freezing wages and outsourcing work. According to Finsec, the combined profit in 2009 for the four largest banks was NZD790 million, while their dividend issue exceeded NZD1.7 billion.

In a media statement Finsec said that there is a gross misbalance between the amount of protection the banks have provided to their shareholders, and the amount of assistance they have provided towards New Zealand’s economic recovery. According to the union, banks should be required to maintain local staff numbers in exchange for being underwritten by the Government’s wholesale borrowing and retail deposit guarantee schemes. The media stament went on to say “The Government needs to toughen its regulation of the banks to include social responsibility and national interest measures to stop this immoral preference towards overseas shareholders over the local economy and staff”.

Photo by Finsec

The multi-billion dollar agreement between the IRD and four Australian-owned banks, the Bank of New Zealand (BNZ), ANZ National (ANZ), Westpac and ASB Bank ,was announced in a settlement by Peter Dunne, New Zealand Minister of Revenue on December 23rd. The settlement, believed to be the largest in the country’s history, revolves around alleged tax evasion by the banks through a series of “structured financing” transactions.

Under the conditions of the settlement banks agreed to pay 80 percent of their disputed tax amount. Westpac will pay the highest amount among the banks at NZD865 million, BNZ will follow at NZD658 million. ANZ National and ASB will pay NZD400 million and NZD250 million, respectively. No penalties or interest charges will be levied by the IRD on the owed amounts.

Though the agreement has been heralded as a victory for the IRD and a beneficial compromise for the banks, taxation experts are dismayed with the settlement saying that a Supreme Court ruling would have given valuable clarification to the New Zealand taxation system. Thomas Pippos, Deloitte tax expert, commenting on the settlement, said, “There was hope that as cases were appealed it would provide greater clarity to the avoidance boundaries”.

Photo by Finsec

The New Zealand High Court made a decision to dismiss Westpac’s challenge to IRD’s decision that the bank owes $586 million in taxes for a series of structured finance transactions. The IRD claimed that between 1998 and 2002 the bank undertook a series of offshore transactions whose sole purpose was tax evasion. The court proceedings centered around nine such transactions, ranging between $390 million to $1.5 billion. Westpac has stated they may appeal the decision upon review of the judgment.

Westpac is currently liable for $918 million, $332 million of which consists of interest charged by the IRD on taxes unpaid. This sum could increase if the IRD decided to impose further penalties, though no official decision has been given on this.

Moody’s Investor Services stated that the outcome will not have an effect on Westpac Banking Corp’s credit rating, which currently stands Aa1. Although, the price of Westpac stocks did fall by 0.6% upon release of the news.

Following a High Court decision in which BNZ bank was found liable to pay $416 million in unpaid taxes and a possible $238 million in use of money interest, thoughts have been centered around how this would affect the banking institution. ANZ bank, Westpac and the owner of ASB, the Commonwealth Bank of Australia are all also entangled in discussion with the Inland Revenue Department about owed taxes.

Moody’s Sydney-based assistant vice-president Marina Ip stated that while significant, the decision would not see the bank pay more than 60% of its expected yearly pre-tax earnings. So, individually this will not decrease its rating, although it is admitted that growth will be affected, it will not see the bank become a non-profitable business.

Standard & Poor’s has already confirmed their ratings of the banks, including BNZ post the High Court decision.

Following a High Court decision in which BNZ bank was found liable to pay $416 million in unpaid taxes and a possible $238 million in use of money interest, thoughts have been centered around how this would affect the banking institution. ANZ bank, Westpac and the owner of ASB, the Commonwealth Bank of Australia are all also entangled in discussion with the Inland Revenue Department about owed taxes.

Moody’s Sydney-based assistant vice-president Marina Ip stated that while significant, the decision would not see the bank pay more than 60% of its expected yearly pre-tax earnings. So, individually this will not decrease its rating, although it is admitted that growth will be affected, it will not see the bank become a non-profitable business.

Standard & Poor’s has already confirmed their ratings of the banks, including BNZ post the High Court decision.

Leading the foray in pre-OCR cuts is Kiwibank, being the first to announce on the 19th of February that they would yet again be reducing rates. They were soon followed by Westpac Bank, other banks are yet to make similar statements.

The Kiwibank variable home interest rate has been reduced from 6.49 to 5.99 percent. As early as five month ago this figure was at 10.22 percent. Kiwibank has set their home loan interest levels at the lowest they have been since the bank’s inception. Similarly, Westpac has reduced their rate to 6.49 percent.

In regards to the cut, Kiwibank Chief Executive Sam Knowles has stated that the current interest rate market is extraordinary. His Westpac counter part, Bruce McLachlan is saying that the market is already pricing in the anticipated interest rate cuts, although numerous uncertainties about the move are still present.

ANZ National Bank, BNZ and Kiwibank have all cut their home loan rates on the 14th and 15th of January, other banks are expected to follow. It is expected by many that the New Zealand reserve bank will cut the OCR by another percentage point in its next meeting. The current rate is 5%. Westpac bank went so far this week as to predict further post January cuts which will see the rate drop to 2.5% in 2009.

The new speculation of cuts is based on economist’s analysis of the New Zealand economy. Even with upcoming tax cuts, newly installed tax credits and the upcoming “Summit on Employment” aimed at stimulating the economy, many predict stark times ahead.

Amidst interest rate cuts from around the world, some analysts are predicting possible deflation in the coming future. Technically, deflation is the opposite of inflation, it is the increased valuation of money, leading to falling prices and decreased economic activity. Subsequently it can lead to increased reliance on debt and in general an unpleasant economic outlook.

At the early stages of the current economic downturn, arguments for or against possible deflation are likely to be moot, as the exact effect of current events is still uncertain, the time horizon for returning to “normality” is unseen and there is little if any event which can be used as a comparison.
The Westpac Economic Overview for November mentions that inflation could reach as low as 1%, but makes no comments to deflation, and predicts that inflation will be in the Reserve bank preferred band of 1%-3% in the near future.

From a more academic perspective, some, like ANZ chief economist Cameron Bagrie have mentioned that deflation is a typical product of an economy moving from the recession state to that of depression. This view is supported by the rapidly decreasing fall in oil prices seen recently, and the current interest rate activity.

Although, the fears of recession could just as easily be placed on the uncharted nature of the current situation and the drastic actions taken by banks and governments. Even ANZ chief economist Cameron Bagrie has said that it would be a big leap to call the current disinflationary environment a deflationary one.

The scheme was announced by Finance Minister Michael Cullen and was brought in under the Public Finance Act. While he went on to say that the government has total confidence in the New Zealand banking sector, the initiative was to ensure confidence from both banks and New Zealand investors. The move follows similar schemes adopted recently by Ireland and Australia.

The Deposit Insurance is currently is pegged at $150 million dollars, and is an optional opt-in scheme, and is planned initially for a two year time period. Currently registered banks and deposits by institutions like building societies and credit unions are eligible for the scheme.

At the time of publication ASB, Westpac and Kiwibank have all indicated that they will participate in the scheme.