The Government's decision not to include a guarantee on wholesale interbank lending in its $150 billion retail deposit guarantee scheme is a major issue with "complex layers and fish-hooks" yet to be unravelled.
World forces may yet come into play and prompt the Government to fall in line and offer an interbank (wholesale) guarantee, or risk becoming unattractive to foreign investors.
Berl senior economist Ganesh Nana and BNZ senior economist Craig Ebert said the interbank lending of wholesale cash was one of the most important issues arising from Sunday's announcement of the Government guarantee and had created a "grey area" requiring more consideration.
Australia has guaranteed both retail and interbank loans, while New Zealand has offered about $150 billion, guaranteeing retail deposits only.
The present credit crunch enveloping the world, sparking major losses with panicked investors selling off shareholdings, is further exaggerated by banks around the world not lending to one another for fear their cash will be lost in bad debts or securities.
Mr Ebert said it was "entirely appropriate for the Government to act as a circuit breaker" to protect bank customers' savings.
However, the lack of wholesale, or interbank, guarantees in New Zealand could see lenders decide to go to Australia as a safer bet - because they would have a guarantee.
"For many in the banking sector, it means that the recent regulatory changes have made matters more difficult, not less difficult," he said yesterday.
With up to 40% of New Zealand bank money coming from offshore, Dr Nana said if international financiers weighed up New Zealand against Australia, they would "clearly go to Australia".
Mr Ebert said both the international and domestic wholesale funding for New Zealand banks was now being compromised.
Even if global rescue measures assisted with an easing on financial markets, New Zealand "would not be an early recipient of those enhanced funds flows because of the lack of a guarantee".
Mr Ebert said the guarantee posed a "moral hazard" as it offered "perverse incentives" for investors to seek higher, riskier returns under the belief it was government guaranteed.
"This [guarantee] has complex layers and fish-hooks in the detail, which need to be sorted through. We are cognitive none of the proposals are set in stone and that this is a work in progress," Mr Ebert said.
National Party leader John Key endorsed the guarantee scheme, but said some changes might be necessary, including extending the coverage of the guarantee to interbank borrowing, as was being offered in Australia.
Dr Nana said while it was not ideal for the New Zealand Government to offer guarantees over interbank lending, it was "only a matter of time before it had to come in line" with other government policy around the world and extend facilities to cover interbank lending.
"Our hand will be forced. In an ideal world we would not need a government guarantee but other governments have delivered a [guarantee] scheme and we can't stand outside that," Dr Nana said.
"[But] the taxpayer will be left holding the baby."
Mr Ebert noted the problem with the guarantee, in its extreme form, could be highlighted by the Fannie May and Freddie Mac mortgage organisations in the United States, which were perceived as government-backed and therefore entered riskier deals, only to fall over, add fuel to the sub-prime crisis and then receive a US Government bail-out.
Interbank lending covers the financial system and currency trading of banks and financial institutions, but excluding retail.
