Managing Risk

New Zealand Centre for Political Research

The New Zealand Centre for Political Research is a web-based think tank that takes a research-based approach to public policy matters and encourages the free and open debate of political issues.

Major external risks faced by nations include warfare, global pandemics and international economic collapse – all events we have witnessed over the last few years. But sometimes, serious threats come from within.

Just such a threat was revealed last week by the Prime Minister who explained that the country is being blackmailed by eco terrorists who are threatening to kill New Zealand children.

Their indefensible action began last November, when letters containing baby formula laced with lethal doses of 1080 poison were sent to the chief executives of Fonterra and Federated Farmers. 1080, a pesticide containing the naturally occurring toxin sodium fluoroacetate, is widely used by the Department of Conservation to control animal pests that infect dairy herds with bovine tuberculosis and destroy native vegetation and wildlife.

The anonymous letters stated that infant formula would be contaminated with 1080 if the government does not ban all further use of the poison in New Zealand by the end of March.

The decision to not announce the threat to the public at that time was based on Police advice. The letters gave a timeframe for action, and since no contamination was planned until after the March 30 deadline, there was an opportunity for the government to develop a test for 1080 and then to batch test all infant formula stocks for the poison.

According to an update to Parliament last week, by the Minister for Food Safety, Jo Goodhew, “The ability for anybody to deliberately contaminate infant and other formula during manufacturing is very low. New Zealand manufacturers maintain high levels of security as a normal routine. Security and vigilance have now been significantly increased since this threat was received. The increased vigilance has been a team effort, with producers, manufacturers, transporters, and retailers all stepping up physical security measures and surveillance to protect these products. We have also developed an accredited 1080 testing programme for New Zealand milk and milk products and have tested 45,000 samples from all New Zealand formula producers, dating back to September last year. The testing will be ongoing, and the new testing is on top of our normal testing, auditing, and verification system. These measures give us the utmost confidence that there is no 1080 in infant or other formula.”

Security has also been ramped up at supermarkets as a result of the threat, through additional CCTV cameras and signage. Some have assigned staff to be ‘milk monitors’, to watch over the stock of infant formula and pass out official advice. In other outlets, all infant formula has been removed from shelves and can only be purchased from customer service counters.

The Government also tightened up controls on 1080 last week, making it the most highly regulated poison in New Zealand. Through new regulations introduced under the Hazardous Substances and New Organisms Act, it is now unlawful for anybody – including research laboratories – to possess 1080 without the prior approval of the Environmental Protection Authority. This will enable the Authority to better track the importation, distribution and use of high purity 1080, and to ensure it is always securely contained.

In response to the threat, the Police launched Operation Concord with over 30 dedicated staff. In addition to investigating who is behind the threat, the Police are ensuring all retail outlets selling baby formula have implemented the new safety regulations.

The Prime Minister has revealed that, “These threats to food internationally are not uncommon and it’s reasonably common for no public statements to be made.” He explained that a decision had originally been made to advise the public of the threat this week – once comprehensive product testing to ensure the safety of all infant formula had taken place – ahead of the end of month blackmailer’s deadline. But with over 1,000 people being aware of what was going on, a leak occurred, forcing the Police and the government to make the announcement last week.

The Prime Minister said that while the government had done all that it could to ensure infant formula is safe, “It is now just a matter of making sure people are careful when they pick up the can at the point of purchase”. He warned consumers to remain vigilant for signs of tampering and to report any such discoveries to the Police.

The Prime Minister also stated there would be no negotiation with eco-terrorists, explaining that the government would continue to support the use of 1080 by the Department of Conservation – in the absence of more effective alternatives to protect native species and reduce the risk of bovine tuberculosis in the national cattle herd.

He also said that the Government had to take the threat seriously even though it was likely to be a hoax, and that there would be no capitulation: “If you capitulated on the back of a threat like this, then when would it ever stop? Ultimately the next issue would be they don’t like the GCSB or they don’t like something else the Government does.”

While our trading partners are reported to have dealt with the news of the 1080 threat in a constructive manner, with limited adverse repercussions, the whole event does serve to remind us, not only how dependent New Zealand is on dairy exports – which make up around a quarter of all export earnings – but also, how interconnected and fragile our economy is.

In 2008 we witnessed first hand the interdependence of the world’s economies, when the global financial crisis brought most countries to their knees. The fact that many nations have still not recovered was reinforced last week by the European Central Bank’s decision to resume quantitative easing. The Bank has committed to buying €60 billion-worth of sovereign assets each month until September 2016, ploughing around €1 trillion into the Eurozone economy.

In New Zealand the global crisis was preceded by a domestic recession caused by the poor economic management of the last Labour Government, which had increased taxes and government spending to the point where the economy had stalled. However, through a change in government and the implementation of prudent financial management, this country weathered the storm better than most.

The New Zealand government agency responsible for protecting the country’s financial stability and supervising the banking system is the Reserve Bank. Since the global financial crisis, central banks have been working together, through the Swiss based Basel Committee on Banking Supervision, on strategies to protect economies from future shocks.

The Committee itself was established by the governors of the world’s leading central banks in response to the financial market crisis in the seventies. As a forum for cooperation on banking supervisory matters, it aims to enhance financial stability by improving the quality of banking supervision worldwide. Through sharing information and by setting minimum standards for the regulation and supervision of banks, they aim to identify current or emerging risks for the global financial system.

In particular the Committee has recommended that higher minimum capital standards should be set for commercial banks, and they have identified loans held by property investors, as a matter needing further attention since international evidence shows default rates and losses during sharp housing market downturns tend to be higher for residential investment loans than for loans to owner occupiers.

The Basel Committee divides assets into five main classes: equity, sovereign, bank, corporate, and retail. At the present time all residential mortgages sit within the retail asset class, whether they are for investment properties or a family home.

In order to account for the difference in behaviour exhibited by property investors under financial pressure, compared to owner occupiers, the Basel Committee has recommended that a new asset class be set up for property investors, with a new capital requirement aimed at providing additional protection to the banking system in the event of a major housing correction.

The Reserve Bank has long considered that New Zealand’s housing market poses a risk to financial stability. With lending on housing making up around a half of all bank loans, they believe that any instability in the housing market could undermine the stability of the wider banking system and the economy as a whole.

Given the over-heated property market in the country’s main population centre of Auckland, where the risk of a housing correction is climbing, the Reserve Bank is now pushing ahead with the new requirements for property investors.

This week’s NZCPR Guest Commentator, investment analyst Frank Newman, explains:

“In effect the Reserve Bank will have its hands on six credit taps which it will adjust to influence the amount of credit flowing through into the economy. The new property investor tap will control the amount of credit available to property investors and therefore a substantial chunk of the demand in the property market. If the Bank wanted to rein in the property market it would turn down the flow of credit by requiring trading banks to hold more capital reserves viz-a-viz their lending to investors.

“Although the property inflation problem is essentially an Auckland one, the Reserve Bank is taking a more macro view. It says, ‘This is not about the state of the property market or penalising borrowers or regions. It is about helping to maintain the stability of our financial system by ensuring that banks classify their lending correctly and hold the appropriate level of capital backing for their loans’.”

The planned introduction of this new asset class by the Reserve Bank later this year follows on from their tightening of controls on high loan-to-value ratio residential mortgage lending in 2013. Those changes restricted the share of mortgages, where the borrower has less than a 20 percent deposit, to no more than ten percent of the dollar value of a bank’s new residential mortgage lending – with some exceptions including for those building new homes and those accessing Welcome Home Loans.

The problem of the overheated property market in Auckland has been caused by an unfortunate mix of poor decision-making by local government, badly designed central government legislation, and an increase in immigration.

In reality, the planning departments of many local authorities have been taken over by environmentalists who believe the world is running out of land and that urban dwellers must be contained to protect the planet. But with New Zealand’s ‘built’ environment covering less than one percent of the country’s total land area, their viewpoint is simply not credible.

The problem has been exacerbated by the bureaucratic local authority planning process, which has enabled long term plans to become ‘captured’ by deep-pocketed environmental lobby groups, determined to impose their ‘smart growth’ policies onto the country, and restrict housing supply.

In addition, changes to the Local Government Act introduced by the Labour Government, which enabled councils to impose expensive levies on housing developers, substantially increased the cost of building. Resource Management Act requirements also imposed costs and created delays, resulting in many planned new homes not being built at all.

The consequence of all of this is that in some parts of the country the supply of new homes has not kept pace with demand. In Auckland, only 7,700 homes were built last year, well short of the 13,000 needed to meet the region’s growing population. This is in spite of the government’s new housing accord, which is attempting to fast-track the planning process.

The reality is that until housing supply meets demand, in some parts of the country house prices will continue to rise. That will ensure the Reserve Bank presses ahead with its plan to establish the new residential investor property class, recommended by the Basel Committee, to better protect the economy in the event that there is a future housing market correction.


Do you agree with the Prime Minister that there should be no negotiation with eco-terrorists? 


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