A cash squeeze could come to bear in the New Zealand banking sector when some of $120 billion of foreign investment in securities is not renewed during the next two to three years as it matures, further depressing the strength of the New Zealand dollar.
The foreign investment is in "carry trades", where investors from countries with low-interest rates buy high-interest bonds in New Zealand.
The majority of the $120 billion is held by Japanese investors in Uridashi and Eurokiwi debt securities, worth an estimated $50 billion, which is offered by the banking sector.
Japanese investors' home interest rates are about 0.02% while in New Zealand they get a return of about 6% interest from the Uridashi securities.
ABN Amro Craigs broker Chris Timms said as the funds matured and came up for renewal the holders were more likely to take their investments back into less riskier currencies at home, especially the yen and US dollar, and returns from New Zealand with falling interest rates would be less.
The kiwi, backed by the highest official cash rate in the developed world (7.5%) for more than two years now, is the sixth most traded currency in world markets.
"Because of the poor economic data coming out of New Zealand, recession fears and the problems in the US with investment banks this week, there will be a lot of repatriation to safer currencies when the securities come due," Mr Timms said.
BNZ chief economist Craig Ebert said the issue would become problematic only if the banking sector had to raise alternate funds to pay out a larger than expected number of departing investors, as opposed to rolling over the investments.
He highlighted banks were well prepared for the maturation dates, and in the worst-case scenario could have to consider selling assets or raise cash offshore, which posed increasing difficulties at present because of the credit crunch.
"They [the banking sector] may have to pay a premium. It is not as easy as two years ago to find [offshore] funding," he said.
While rasing more cash was a problem, the banks would be removing the Uridashi debt from their balance sheets.
Similarly, while the movement of cash would depress the strength of the kiwi, it would work in favour of exporters while importers would be hard hit, Mr Ebert said.
