Foreign exchange trader delighted at Reserve Bank's tough stance during economic crisis
It can be too easy to forget the sins of even the recent past.
So it's good to meet a businessman with institutional knowledge and a long memory, and be reminded that the Australian-owned banking sector was not always an outright asset to New Zealand's economic stability.
In 1991 Mike Houlahan co-founded foreign exchange business Tuatara, which now handles more than US$1 billion in transactions each year. In 2007 he and co-founder Hils Hunt also established cloud computing treasury system CNS, which, at Houlahan's last count had financial instruments worth US$8.5 billion on the system.
Houlahan doesn't say, but it's a no-brainer that he's one of dozens of business people the Reserve Bank regularly interviews as it forms a picture of the nation's economic health (in addition to more formal forecasting methods).
"In the lead-up to the crisis, the Reserve Bank kept warning the banks about how they were running their business," he remembers. "Every time [governor Alan] Bollard came out and warned them, he would get a visit from each of the bank heads from Australia, who would tell Bollard, in no uncertain terms, not to tell them how to run their business."
Tuatara is in a unique position because foreign exchange traders operate in the inter-bank market, as a go-between for the corporate sector and hedge funds, and banks.
"When it all went pear-shaped," he says of events in 2008, "they all went running back to the Reserve Bank and said, 'you have to give us money'." According to Houlahan, Bollard made the banks sweat before introducing measures allowing them to borrow money. "[Bollard] said, 'I'll lend you the money on one proviso - you sign up to the liquidity ratio'," he recalls.
The new liquidity ratio meant banks had to hold more long-term funding and more domestic money, rather than short-term offshore funding.
"The liquidity regime - that's been fantastic," he says, "and I don't think Bollard is given nearly enough credit."
Tuatara's core business is providing hedging cover for importers and exporters, to protect companies from exchange rate volatility.
He cites an example to illustrate how it works: An importer of American sports gear, paid for in US dollars, is a new client. The higher the Kiwi dollar the better, because then the gear costs less in local currency.
The importer had budgeted on a conversion rate of about 75c as acceptable.
When the Kiwi appreciated, Tuatara advised it to buy forward cover and a proportion of the transaction was locked in at a conversion rate of approximately 82.5c, says Houlahan.
"The landed cost of the product will be 10 per cent less than he budgeted on, so that's extra margin for him," he says. "If the currency falls [and it has dropped slightly recently] then he's protected.
"But if it keeps going up, that's an opportunity cost but he's happy to have locked in a portion of his [increased] margin."
It's tougher for exporters because they get limited opportunities to take advantage of currency movements. The kiwi tends to grind up slowly and then when crisis hits, suffers precipitous falls.
Houlahan points to December "when everyone was freaking out about Greece". The kiwi fell to about 75c against the US dollar, staying there for a week or two before resuming its climb.
It's these moments when exporters must strike swiftly to lock in the favourable rate, he says, citing apple exporters during the Greek crisis.
Readers wondering why the NZ dollar is so strong against currencies like the pound, when things are pretty hard here, need to remember that the British government printed billions of pounds to bail out its banking system: "There's about 250-300 billion more pounds in the world, relative to New Zealand dollars," says Houlahan.
Tuatara's sister company is treasury system CNS, which is a web-based system run through the auspices of Telecom and Gen-i, where all the information is stored in a computing cloud.
Initially formed to serve large corporates adopting to the international financial reporting standards it now handles foreign exchange, interest rate and commodity hedges (where buyers lock in an interest rate or a commodity price to guard against fluctuations).
It now operates in about 10 countries, including the big economies of the US, Germany, France and Britain.
Fall & rise
The Kiwi dollar, past 12 months
High (August 1, 2011): 88.17USc
Low (Nov 25, 2011): 73.87USc