Economies: NZ not safe against turbulence

The news yesterday that Canterbury Mortgage Trust, one of New Zealand's larger lenders, has run into trouble indicates the depth of what many had thought was a little local difficulty over there in the US in 2006 when the first signs appeared that have turned into the current crisis that has been given all kinds of media-friendly names when what it really is is a mismanaged economy.

It was in mid 2006 that the first of the current batch of financial businesses in New Zealand said it was in trouble. Canterbury Mortgate Trust, or CMT, is number 23. No one expects it to be the last.

CMT raises funds from investors and lends them out. It therefore classifies itself as a fund not a finance company. CMT implies that, if it is in trouble, then the rest of the world may be about to fall in. No subprime or dodgy lending here, it says: only first mortgages, maximum lending of between 50% (agricultural land) and 75% (residential properties) of valuation. And it has a small default book.

The problems CMT faces, it says, are not due to management or risk failures, but rather to a culture of fear amongst investors which have led to "unprecedented" levels of withdrawals. CMT does not suggest that there is a run, but it's certainly been a brisk walk with NZD6 million leaving the fund in just two weeks.

The response by CMT has been similar to many funds over the past few months: it has frozen payments.

Today the CMT website was rather short on presentation. The "Investor Letter" says "As you are probably aware, the majority of investors' money is invested in about 300 mainly short term loans secured by first mortgages."

The letter goes on to say that interest payments due on 1 October 2008 will be paid on time but that the return may be less than previously, in part to facilitate the making of provision "against any further losses in the loan portfolio in the light of the current state of the financial and property markets, so that investors' capital is protected."