News and Opinion, sponsored by RaboPlus

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Bernard Hickey delivers an Economic Weather Report in association with BNZ on the inevitability of de-leveraging of very high levels of debt globally. This is topical in the wake of Barack Obama’s announcement of a US$1.6 trillion budget deficit this week, which could push America’s public debt to GDP ratio to close to 100% once related liabilities are included.

The United States has essentially delayed a day of reckoning over the last 18 months by transferring massive private sector debts to the public balance sheet and hoping it can skip through a recession without a big increase in interest rates and debt defaults. But all it has done shifted the required de-leveraging along rather removed it.

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The number of families vulnerable to high debt has more than doubled over the past four years, a new study by The Treasury says, with one in five spending more than 30% of their gross income on debt repayments.

In recent years, the total debt of the household sector has risen appreciably.

This has led to concerns about “excessive” borrowing, and to the possibility that some households may have become unduly vulnerable in the event of unexpected shocks.

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Bernard Hickey delivers the key news overnight in 90 seconds at 9am in association with ASB, including news European stocks fell 3.2% overnight on fears about Dubai’s massive debt default, Bloomberg reported.

Dubai World has asked to delay payments to bankers on US$60 bln of debt. Royal Bank of of Scotland and Barclays are seen most exposed. European banking stocks were hit hard on fears Dubai’s debt default could prove contagious. US markets are closed for Thanksgiving.

Meanwhile the New Zealand dollar fell to 71.5 USc as the Dubai debt fears reduced appetites for risky currencies. The New Zealand dollar also fell further against the Australian dollar, which in turn dragged the TWI down to 64.

The gap between the NZ and Australian economies is seen widening as Australia’s economy surges and New Zealand’s stays in the doldrums.

By Infometrics economist Gareth Kiernan

Over the last five years, New Zealand’s export volumes have grown by an average of just 1.4%pa. During that period, of course, exporters have grappled with a high exchange rate and an international recession. But the growth figure is still the worst in more than thirty years, and continues a trend of a deteriorating export performance since 2003.

Exports aren’t the be-all and end-all for the economy, but their lacklustre performance highlights the need for New Zealand to alter its economic model if we’re to avoid a debt crisis down the track.

The one feature that has helped keep New Zealand afloat over the last few years has been the terms of trade. Put simply, the price of those products we export has risen, while the price of what we import has fallen – so our purchasing power on the world stage has improved. Without the terms of trade lift, our export incomes in recent years would have looked nowhere near as impressive, and the current account deficit would have been much worse – although arguably financial markets would have driven the exchange rate lower to help offset these negatives.

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Bernard Hickey details an Economic Weather report in association with ASB on New Zealand’s foreign debt and how it has blown out to 140% of GDP in the last year, endangering our credit rating and threatening to spook foreign investors. Here’s the interactive chart on foreign debt.

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By Infometrics economist Matt Nolan

With New Zealand’s net international debt hitting 98% of its annual production (GDP) in March there has been a lot of talk regarding the fact that we seem to have borrowed excessively relative to the rest of the world. As the global economic situation gradually makes it more difficult for a small country like New Zealand to bury ourselves in debt, it is important to look at why we could be borrowing so heavily.

Excessive borrowing occurs when households, businesses, and/or government borrow more than is justifiable given a reasonable outlook for future income.

Economic theory suggests that there are three main causes of excessive national borrowing:

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