Kiwi still flying 25 years after devaluation

With the New Zealand dollar stuck stubbornly above US60c, the 25th anniversary of the devaluation on July 18, 1984 is a timely reminder of how not to bring a currency down.

In the end, the incoming Labour Government had no choice but to devalue. But the events leading up to the big day were a political scandal and, almost, an economic disaster.

More than a $1 billion in currency flowed out of the country as speculators took their chance and the Government was almost bankrupted as it borrowed to cover its position.

Financial adviser Chris Lee, a trader at the time, said people exploited the devaluation.

"The banks and the Dairy Board, Meat Board and the Wool Board and so on, made killings. We all knew it was coming and so what you did was delay the repatriation of your overseas receipts.

"You just waited and waited, and the more you waited, the more disastrous the position was for the Reserve Bank and eventually that forced the devaluation to be even higher. The moment they did it, you bring the dough in and make an instant gain."

Speculation about devaluation grew in the months before the big day. In 1983, after an early election in Australia, the incoming Labor Government was forced to to devalue the aussie dollar after a run on its currency.

In New Zealand, 1984 was an election year. When then-Prime Minister Sir Robert Muldoon called a snap election for July 14, market players began to move money overseas in expectation that David Lange's Labour party would follow the Aussie lead.

Herald reports from the time show Sir Robert was completely against a currency devaluation while the Labour Party appeared divided, with Lange not ruling it out and finance spokesman Roger Douglas saying it was not going to happen.

The day before the election, the money markets virtually froze and some trading banks were forced to sell Government stock back to the Reserve Bank to cover their cash requirements.

When Labour won the election, the Reserve Bank closed the foreign exchange market completely.

Officials told Lange and Sir Robert the dollar should be devalued but neither party would agree.

When Sir Robert spoke on television of the run on cash, Lange slammed him.

Lange claimed Sir Robert had committed economic sabotage by misrepresenting the true position of the country's finances.

Sir Robert wanted Lange to make a joint statement that there would be no devaluation but Lange declined.

Lange said the Treasury Secretary and Reserve Bank advised him not to make the statement as it would be neither effective nor credible.

Lange then described Sir Robert as having a "bunker mentality" and called for the defeated Prime Minister to resign so the new Government could take over.

On July 18, four days after the election, Lange announced a package that included a 20 per cent devaluation, removal of interest rate controls and a three-month freeze on prices.

He also promised a review of export incentives.

The dollar dropped from US62c to US50c.

In an unusual move the Reserve Bank Governor, Spencer Russell, openly spoke out, backing Lange and said there had been a massive run on the dollar in the lead-up to the election which saw up to $120 million a day leaving the country.

In the four weeks up to the election $1.39 billion left the country - more than the yearly outflow of $1.08 billion for the year to May 31.

Rather than devalue, the National Government had ordered the Reserve Bank to take out forward cover on foreign exchange - a form of insurance guaranteeing a shield for importers against devaluation. But forward cover was costing the taxpayer hundreds of millions of dollars.

During the month-long run on the dollar, the Reserve Bank and Treasury borrowed $1. 7 billion - almost twice as much as revealed during the election campaign.

Russell said devaluation was needed to protect foreign reserves from further depletion and to avoid more borrowing to ensure the short-term debt did not grow so fast it placed too heavy a burden on future fundraising.

The bank estimated the cost of the devaluation at $350 million.

After the announcement Lange said "never in this country again" must capital be driven offshore.

Lee recalls the Reserve Bank got its revenge a few months later in February and March 1985 when the dollar was floated.

"That meant there was no longer the ability to screw the Reserve Bank which screwed the financial markets by lending them money to survive on what we would call now the Reserve Bank window.

"Where you had been able to borrow at cheap prices and make money suddenly, the call rates went through the roof. Others paid 1000 per cent per annum on unofficial markets."

Lee reckons his company lost around $9 million in a month through having to fund too much of its loan book through the overnight money markets.

Yesterday, the NZ dollar closed at US64.40c, up from US63.90c on Thursday.