FINANCIAL COMMENTARY
A silver lining to the global financial turmoil
With Greece on the brink of defaulting on its debt there is good reason for concern, in part because NZ banks still rely significantly on overseas funding. But the latest turmoil has a silver lining.
With government debt of around 180% of GDP and a fiscal deficit of around 15% of GDP the financial problems in Greece are insurmountable. No wonder the market is pricing the risk of Greek default at slightly over 90%.
The important question is not whether Greece will default but whether it will drag down other Eurozone countries and the international banking system with it. I live in hope, but firms are well advised to bolster cash reserves just in case access to credit becomes a major issue again.
NZ is exposed to the turmoil in Europe and the US because of the negative impact it will have on exports and because we still rely significantly on overseas funding.
Policy initiatives by the RBNZ have forced banks to fund more from the local retail market and to rely less on short-term overseas funding. But based on the July data from the RBNZ, the banking sector still obtains 34% of its funding from non-residents, as shown in the chart.
But the latest turmoil has a silver lining. It has poured cold water on the bank economists who have been barking for early OCR hikes.
On 28 July Governor Bollard stated that “Provided current global financial risks recede and the economy continues to recover, the Bank sees little need for the March 2011‘insurance’ cut to remain in place much longer.” Since 28 July the risks have increased rather than receded. The implication of Bollard’s logic is that if the crisis and global growth prospects get significantly worse the next move in the OCR should be down.
The continued international financial turmoil also means the predictions by some bank economists that the OCR will be hiked to 5% or so are misplaced. This is because the crisis has driven a much larger wedge between the interest rates faced by borrowers and the OCR.
Written by Rodney Dickens.
Visit www.sra.co.nz to learn about SRA Ltd’s services.
Graph relating to finances.
The chart shows the % of New Zealand bank funding sourced from non-residents. Source: RBNZ