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By Jason Brown

AVARUA, Rarotonga, Cook Islands (May 11, 2000 - Islands Business/ PINA Nius Online)---A little spec of emerald in the vast east Pacific, the capital island of the Cook Islands hardly looks like it's recovering from the economic crisis. All 85 kilometers (51 miles) of Rarotonga roads are well paved, power is a near faultless 24-hour service -- and every second vehicle seems to be a shiny four-wheel drive. In fact, the level of new and second hand car sales in a country that suffered government collapse less than four years ago amazes even the locals.

"I don't know where everyone gets their money from," is common comment. Some say the answer is a common sense equation of mass migration easing unemployment pressures. Some point to a surprisingly high level of savings.

Others suspect the banks are chasing easy dollars, encouraging Cook Islanders to invest in easily securable luxuries rather than more risky venture capital. Banks agree to the first two, but deny the last.

Safety valve: Cook Islanders have always enjoyed one safety valve since self-government in 1965: citizenship of New Zealand.

But there is a more surprising answer as well. The surprising part? Cook Islanders responded to even the promise of reform. Money soon flowed back in by the millions and has stayed right through the crisis 'till today.

"The banks are very liquid," says Chris Lancaster, manager of the country's smaller commercial bank, ANZ. On call cash and term deposits stand at $US 40 million, including those with the Cook Islands Development Bank and the Post Office Savings Bank. Personal and commercial loans with all four banks are $US 31 million.

Funny. From a nerve splitting near total collapse and the loss of millions, the banks found themselves with too much cash and not enough people to give it to. Once horrific loan interest rates dropped significantly, while once enviable deposit rates have also shrunk, from a high of nine percent to three percent today.

But more attractive loan rates have not translated into more loans, especially for business. Instead, money seems to be going on cars. Lots of cars. Vehicle import levels dipped by a third even before the '96 crisis, and then resumed their steady climb, exceeding pre-crisis levels by last year. Competition has helped. Where once buyers were faced with a choice of high prices from seemingly cozy dealerships -- $US 15,000 for a simple two-door, two-wheel drive pickup -- prices today are nearly half that much.

Easy loans? Banks deny they are getting rid of cash by promoting easy loans for cars that add little to the economy. "Personal loans are only a small part of our overall portfolio and car loans are only a small part of that," says Westpac manager, Terry Smith. Westpac is the country's biggest bank and holds most of the country's larger business accounts. But there are worse accusations.

Classified advertisements have appeared recently for land mortgagee sales. Banks list their phone numbers and a staff name to talk to, but not their own name or logo. Some accuse the banks of callously seizing land from the same people they so casually lend money to for flash cars.

Smith is adamant. "Loans against land would be a tiny, tiny percentage of our portfolio." He says there have been no forced mortgagee sales over a car loan and ANZ's Lancaster says the same thing. Lancaster says the sales are few -- less than a dozen -- and are hangovers from the 1996 crisis, the many job losses, as well as loanees disappearing overseas.

So if the luxury car-land scam scenario is off the mark, where is all the money coming from? "You might want to talk to the finance companies," suggests Smith. And couldn't it be better used elsewhere? "We are open to good, solid, commercially viable projects," responds Smith, "but so far there haven't been a lot of them."

Lancaster for his part sits in an office which has a lovely view inland of graceful mountains. Look to his left and, a block down the main road, he sees an example of what the bank obviously feels is a good solid project – a two-story $US 1.75 million building that will be the new home for ANZ and other businesses. Other than that he's already said the same thing as Smith: bring us a good project and we'll support it.

Both banks do have big projects on the books, but not enough of them. Lancaster says the banks have to adhere to usual conditions of security and equity for loans. He agrees there may be a need for more venture capital for riskier business start-ups. That, he and Smith say, is where the Cook Islands Development Bank (CIBD) comes in.

CIDB's political bosses, however, are in the middle of a fight with two directors it is trying to sack, two of the most successful businessmen on the beach. New chairman of the board is Vaine Teokotai, who doubles as chief executive officer for the deputy prime minister, Norman George.

As the country's junior coalition partner, George is well known locally as a harsh critic of business people, accusing a "cartel" of trying to run the country -- and being drug abusers and smugglers as well. Neither Teokotai or his manager Unukea Kauvai responded to faxed questions about banking. Cornered casually at the Justice department's public counter one afternoon, the usually affable Teokotai was evasive, saying: "Make me happy and I might talk to you."

How do we make you happy? "By leaving me alone. I'm busy." Between the harsh realities of business finance and a development bank intent on jobs for the boys, it seems real business finance is still taking a back seat to items like cars that most other Pacific Islands recovering from the crisis would see as enviable luxuries.

When budgetary and project aid had been utterly exhausted by early 1996, the former government of Sir Geoffrey Henry continued to deny there was a problem. By late 1996, however, the first of 2,000 public servants were "transitioned." Overall population dropped from 22,400 at the end of 1995 to 16,000 today.

Dole queues: Nearly one in four Cook Islanders moved onto fresh jobs -- or the dole queues -- of New Zealand and Australia, where their Kiwi passports are giving them free and instant access. Remission money so important to countries like Samoa and Tonga is worth less in the Cooks than the fact that the roughly 2,500 public and private workers that remained were not having to support 2,000 unemployed relatives and their families.

In 1995, Henry threatened to force banks to carry $US 2 million in unbacked overdrafts and local currency, on top of state debts that government itself figured at $US 125 million. While he was hanging tough, millions in private savings and term deposits continued to zoom out of the country. Henry's threat and the loss of a huge chunk of their deposit base was the final straw for long suffering foreign owned banks, Westpac and ANZ. They gently explained fiscal reality to the chief engineer of Raronomics. They then made sure he got the message by not so gently freezing government's overdraft facilities.

Henry swallowed his pride, withdrew local currency and got his team to grudgingly accept the need for reform. In 1996, the Asian Development Bank officials -- mostly New Zealanders -- were brought in to rewrite financial laws, tighten up on spending and start wholesale sackings in the region's most bloated public service.

Cheaper prices arrived when one importer, Pickering Motors, discovered a gap in punishing levies of 100 percent against second hand cars. Diesels are exempt. Five-year-old Nissan Terranos and Laurels with diesel motors are the new everyman and woman's vehicle of choice.

Prices are kept down too by short warranties, as little as three months. The granddaddy of Cook Islands car dealers, Motorcentre, is responding from the opposite angle: small but nippy Daihatsu sedans for about $US 8,000, brand new, with a three-year warranty.

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