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Opinion: The clock is ticking on NZ$84.5 bln of foreign debt
These are nervous times for banks all around the globe as they try to refinance debt they owe to banks in other countries. The international inter-bank credit markets virtually froze this week as banks stopped trusting each other. They were petrified in the wake of the shock collapses of AIG, Washington Mutual and Lehman Bros, the forced mergers of Merrill Lynch, Halifax Bank of Scotland and Wachovia, and the bailouts of Fannie Mae, Freddie Mac, Bradford and Bingley, Fortis and Dexia. 
Reserve Bank Governor Alan Bollard acknowledged the disruptions on global credit markets this week when he said some parts of the inter-bank markets had "jammed up," which would be a significant concern if they remained frozen for longer than a few days. This matters for New Zealand's banks because over the last 5 years New Zealand banks have borrowed heavily in these international credit markets on our behalf and have shuffled it through to us in the form of more and bigger mortgages, which have promptly use to boost house prices.
About 47% of all bank lending in New Zealand is funded by offshore borrowing, while about half of that offshore borrowing has to be refinanced every 90 days. Our national accounts show NZ$25.1 billion of our debt is "at call", which means it has to be refinanced daily by our banks. This is slightly more than double what it was 5 years ago before the housing boom. There is a further NZ$59.4 billion that has to be refinanced every 90 days or less, which up up about 60% from 5 years ago. This combined NZ$84.5 billion of debt rolling over every 90 days or less is what is keeping our bankers and the Reserve Bank Governor up at nights. If the inter-bank credit markets were to remain frozen for much more of that 90 days, New Zealand's banks have a significant issue to manage. The problem isn't quite as bald or as bad as it appears. Most of that NZ$84.5 billion is borrowed from parent banks in Australia or one of the other big four banks in Australia. There is still inter-bank lending going on between these big four banks, which include Commonwealth Bank of Australia (CBA), ANZ (ANZ and National), National Australia Bank (BNZ) and Westpac, although at higher costs. So the real issue becomes whether the foreign inter-bank lending between Australia's big banks and the rest of the world jams up too. Most estimates put the size of this short term foreign debt owed by Australia's banks at around A$150 billion (NZ$175 billion). The danger with any short term debt is the unexpected knock on the door from the lender saying they want their money back rather than just letting it roll over. There's no suggestion non-Australasian banks would want to take all their money back at short notice. What's much more likely is they would want some of it back and charge a lot more for the rest. This is the inevitable result of borrowing too much too short from the rest of the world to invest in housing. The Reserve Bank and others have warned that eventually New Zealand's banks and ultimately all the mortgage borrowers would be at risk if market volatility disrupted that supply of cheap short term money. Technically, our banks have the ability to ask for the mortgage to be repaid at any time, even if it is structured as a 20 year mortgage. Any wholesale recall of that mortgage debt would cause chaos and destroy a bank's brand. What's more likely is a crumbling at the edges where banks stop new lending and are extremely tough with any refinancings or top-ups. Borrowers wanting 80% plus loans or "˜low doc' loans can forget about it for now in the current environment. The moment of truth is upon us as credit markets seize up. Our Reserve Bank Governor and our banks will be crossing their fingers the freeze thaws soon. If it doesn't, those who fund offshore (ie not Kiwibank) will be increasing fixed mortgage rates significantly and curbing new lending drastically.
11 Comments
Bernard.......Tick, tock, tick, tock...I trust
Bernard.......Tick, tock, tick, tock...I trust you didn`t glean that analogy from from Peter Pan`s adventures with evil Captain Hook in Nevernever Land ? Not much fun at sea in drifting boat with no bucket, paddle or reliable map.Hope the Bank crew don`t have to resort to the dire process of drawing short straws!!
Bernard, Does this mean that
Bernard,
Does this mean that deposit rates in this country will rise as banks compete for funds here ?
And once again, a clear,
And once again, a clear, uncomplicated, unbiased explaination, in lay terms as to what is happening, a breath of fresh air
Well Done BH.
"Borrowers wanting 80% plus loans or "˜low doc' loans can forget about it for now in the current environment."
Or in other words, old school, show us u can save up the cash, have a good budget, can afford it, and we will lend you the money...
20% equitity, got your foot in the door
33% equitity, basically secured the security
45% equitity , gave one the asset backing to expand
Scraping these age old principles is what has got the markets into a pickle in the 1st place...mortgages, credit cards, ODs, HP....
Tossing some thoughts around.
"The international inter-bank credit markets virtually froze this week as banks stopped trusting each other."
If/when congress does a bailout...there would be more to float around, BUT surely the "trust "factor would still be very strong?
And, if NZ/Aussie banks are (as we are being told), and seen to be the more secure than most internationally, surely would we not be given more preferentual rankings?
After all it is business, in troubled times and the security of the investment would be of greatest concern?
Hence because of this we would see less effect than many other countries around the world?
OK, some serious logic from
OK, some serious logic from up here in the land of yen mums.
Right now I would not personally send yen to a NZ Trading bank. I will wait till the NZ/JP floats (sinks) to at least 65 before I would be tempted. Then I would be rooking for "Interisk" not interest of at least 10%..even then would it be secure ! The Japanese are cautious when it comes to money they think and count it out to the last little yen (pronounced `en`)
Spacemonster, I doubt term deposit
Spacemonster,
I doubt term deposit rates will rise. They are likely to fall just as fast as the Official Cash Rate is cut because banks need to preserve as much margin as they can to compensate for the pain they are taking from their foreign funding. Also, they know there isn't much choice out there at the moment and a significant flight to quality going on.
cheers
Bernard
Hope the US government's effort
Hope the US government's effort to inject billions in the economy will have some short term improvements on the US economy, though likely a recession may be looming.
Nothing has changed that was
Nothing has changed that was not visible months ago.
I am though reassured as a saver by what you say above. I have some knowledge of the Swedish experience of the 1990.s. People were truelly brought to their knees and had the blood wrung out of them as the banks called in loans and delevered to save themselves. Seems that NZ banks are similarly able to wring the blood out of those who they have profited from with their stupid lending.
Why do you say this?
"over the last 5 years New Zealand banks have borrowed heavily in these international credit markets on our behalf "
Our behalf?? What aspect of "our behalf" is it when a scenario is created by insane lending practices that risks creating some kind of great depression II?? How can the governor describe himself as part of the inflation fight when he allowed all of these banks to lend like this as part of some silly experiment or design that ordinary folk are not privy to? How come when he finally wakes up or whatever he does and decides to change course that he can instruct all of the banks to instantly change course and prepare for difficult times?? What really happened?
I hope for all our sakes that people like Gareth morgan are wrong. But he is probably totally correct. No monster bubble ever got beyond its long term historic trend without crashing back down again. To ignore that reality and imagine that what is done is done on 'our behalf' is really too much.
I am finding myself crying at the horribleness of those who are losing homes and dreams. And if Morgan is right we are only just beginning. I will be ok but i feel crappy about being part of something predictable and which i will probably profit from. I feel ashamed of myself
"How can the governor describe
"How can the governor describe himself as part of the inflation fight when he allowed all of these banks to lend like this as part of some silly experiment or design that ordinary folk are not privy to? "
Because once upon a time the RB could do more than play with an interest rate
They have far more tools, like bank desposit ratios, regulate deposits on houses and cars. HP
The the free thinking, free market legistators came along and took all that away.
So all the RB could do was continually , over the last 2 to 3 yrs, issue statement "kiwis HAVE to save," " Kiwis HAVE to limit their borrowing" "the market is over valued" all falling on a majority of deaf and greedy ears.
Cant blame the RB...they did their best under the circumstances....and as it turns out, where right.
Where we had a situtation that banks automatically upped credit card limits, with no regard to individual or family income, and say hey u can affiord credit 3 or 4 times your total family income Plus your mortgage..Defies logic
Some ppl collect stamps...we collectted bank credit limits or the last 10 yrs...never used it.
Steptoe I have often heard
Steptoe
I have often heard in the media that the arguement the reserve bank is an impotent organisation that can only change interest rates as a single tool. As i pointed out the reserve bank was able to ask banks to capitalise for a 30% fall in prices. Did that require an act of parliament?
How could the American system
How could the American system not fail when a person could go and buy a house for 10 times more than they could ever affored to pay for and borrow 100%. Live in the house for 6 months to a year and hardly pay anything back so rent free. When the going gets tough they pack up, drive to the bank in there fancy pickups stop at the bank to throw the keys in the door saying nothing and have no debt or responsibility to follow them. They can drive down to the next bank and do it all again. No finance system in the world can win against such irrisponsible behaviour. The US govt created this during the last deppression and still refuse to make US citizens responsible for there actions so it can happen again. Good old USA where everyone is a winner.
Thank's for A Good Post!
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