1987 New Zealand sharemarket crash

1987 New Zealand sharemarket crash
Name	New Zealand sharemarket crash (1987)
Caption	Trading floors and financial districts affected worldwide
Date	19 October 1987
Location	Wellington, Auckland
Type	Financial crash
Cause	International capital flows, computerised trading, leveraged speculation
Outcome	Deep market declines, regulatory reform

1987 New Zealand sharemarket crash

The 1987 New Zealand sharemarket crash was a rapid and severe decline in New Zealand equity prices coinciding with the global Black Monday collapse, affecting financial centres such as Wellington, Auckland and provincial brokerage houses. It produced sharp losses for institutions like the New Zealand Exchange, ANZ Bank, and investment funds associated with entities including Rutherford & Co and Mercury Energy, and precipitated policy responses from the Reserve Bank of New Zealand and the Fourth Labour Government of New Zealand. The episode interacted with international events involving New York Stock Exchange, London Stock Exchange, and markets in Sydney and Hong Kong.

Background

In the mid-1980s New Zealand experienced transformational reforms under the Rogernomics programme led by Roger Douglas and the Fourth Labour Government of New Zealand, which altered ownership in public utilities such as Air New Zealand, New Zealand Post, and New Zealand Railways and encouraged financial liberalisation. Deregulation allowed increased participation by institutions like the New Zealand Superannuation Fund and trading firms such as Fletcher Challenge affiliates, while capital flows linked local markets to international centres including New York Stock Exchange, Tokyo Stock Exchange, and London Stock Exchange. The domestic financial sector featured brokers like Jarden and fund managers connected to corporate groups such as Brierley Investments and ASB Bank, and the regulatory environment involved bodies including the Securities Commission of New Zealand and the Reserve Bank of New Zealand.

Timeline of events

In October 1987 global equity indices plunged after turmoil on the New York Stock Exchange on 19 October (Black Monday), with knock-on effects on London Stock Exchange and Toronto Stock Exchange. New Zealand markets, operating hours ahead of Wall Street, reacted as international orders and electronic linkages hit the New Zealand Exchange and trading desks at houses such as National Australia Bank affiliates and local brokers. Major listed companies including Air New Zealand, BP New Zealand, and Transpower recorded substantial intraday and multi-day falls as margin calls forced liquidations, echoing episodes seen at Krackkenbank and losses faced by multinational conglomerates like BCCI elsewhere. The immediate sequence included steep falls on 19–22 October, distressed asset sales, and a period of volatility extending into late 1987 and 1988 that impacted pension funds such as the Government Superannuation Fund.

Causes and contributing factors

A mix of international and domestic factors contributed: global panic originating on New York Stock Exchange exacerbated by program trading and portfolio insurance models used by institutions like some investment banks; high levels of leverage among local brokers and corporate raiders exemplified by groups with ties to Brierley Investments and Rutherford & Co; rapid deregulation under Rogernomics that increased capital mobility; currency pressures involving the New Zealand dollar; and inadequate market circuit breakers on the New Zealand Exchange. Structural weaknesses in market infrastructure, the rise of institutional investors including Trustees Executors and unit trusts, and contagion through international financial centres such as Hong Kong Stock Exchange and Sydney Futures Exchange amplified the shock. Policy shifts at central banks like the Federal Reserve and actions in commodity markets involving firms such as Fletcher Challenge also played roles.

Market impact and economic consequences

Equity indices on the New Zealand Exchange plunged, wiping billions in market capitalisation from firms like Air New Zealand, Fletcher Challenge, and New Zealand Forest Products. The crash undermined balance sheets of banks including BNZ and Westpac NZ indirectly through exposures to corporate borrowers and brokerage firms, and affected institutional investors such as the New Zealand Superannuation Fund and corporate pension schemes tied to companies like Government Printer. The shock reduced household wealth, depressed investment by conglomerates like Brierley Investments, and contributed to a contraction in credit growth overseen by the Reserve Bank of New Zealand. International repercussions mirrored losses on the Frankfurt Stock Exchange and Singapore Exchange, while local insolvencies and restructurings involved asset managers and trustees.

Government and Reserve Bank response

The Fourth Labour Government of New Zealand and the Reserve Bank of New Zealand intervened to stabilise financial conditions by monitoring liquidity in banking institutions such as ANZ, BNZ, and Westpac NZ, coordinating with regulatory bodies including the Securities Commission of New Zealand and ministers such as Ruth Richardson and Roger Douglas. The central bank adjusted monetary settings and provided lender-of-last-resort facilities to support clearing at the New Zealand Exchange, liaising with international counterparts like the Federal Reserve and the Bank of England. Fiscal policy responses involved reassessment of privatisation timetables affecting entities like Electricity Corporation of New Zealand and state-owned enterprises such as Telecom New Zealand.

Aftermath and regulatory changes

In the years following, New Zealand implemented reforms to strengthen market infrastructure, introduce circuit breakers and improve disclosure rules enforced by the Securities Commission of New Zealand and later by the Financial Markets Authority (New Zealand). Oversight of brokerage practices, margin requirements, and corporate governance for groups such as Brierley Investments and listed firms like Air New Zealand was tightened, influenced by lessons from regulatory responses adopted in jurisdictions including United States Securities and Exchange Commission reforms and changes at the London Stock Exchange. The crash accelerated debates over financial liberalisation begun under Rogernomics and prompted revisions to prudential supervision by the Reserve Bank of New Zealand.

Legacy and historical significance

The event remains a landmark in New Zealand financial history, shaping perceptions of market risk for institutions like superannuation schemes, trustees such as Public Trust (New Zealand), and corporate financiers including Fletcher Challenge. It informed subsequent crises, regulatory developments that culminated in agencies such as the Financial Markets Authority (New Zealand), and scholarly analysis comparing responses in centres like New York City, London, and Sydney. The 1987 episode is recalled alongside global crises such as Black Monday and the 1997 Asian financial crisis as formative in the evolution of modern market surveillance, electronic trading oversight, and prudential policy in New Zealand.

Category:Economy of New Zealand Category:Stock market crashes Category:1987 in New Zealand