BNZ economist Stephen Toplis says a Greek sovereign debt default is highly unlikely to be be another 'Lehman' moment and lead to another global financial crisis which would see New Zealand banks unable to access funds on global financial markets.
In comments released today, Toplis addressed concerns in New Zealand about the possible fallout from the European sovereign debt crisis.
In 2008, following the bankruptcy of US investment bank Lehman Brothers, NZ banks were effectively locked out of financial markets for months meaning they were unable to access foreign money that made up about 40% of their funding. The Reserve Bank had to intervene by setting up funding lines for the banks until global markets opened up again in 2009.
On concerns a Greek default would be a 'Lehman II' moment which could trigger another global crisis, Toplis said, “In our view we believe that this is highly unlikely.”
"Whilst Europe, and therefore the rest of the world, is facing a solvency crisis, this is not a liquidity crisis as there is still plenty of cash around. But folks are not willing to fund dodgy banks or dodgy countries," Toplis said.
“This time the risks around the potential solvency issues are widely understood and we know who is holding whose debt," he said.
Greek debt holdings are largely vanilla in nature.
"For example, Greece has issued core Government debt in the form of bonds which have been purchased by banks," Toplis said.
The current situation differed from the time of the Lehman’s collapse in a number of ways.
"Back then no one really understood who was leveraged to whom, as ultimate ownership was often hidden through complex financial instruments," Toplis said.
New Zealand bank balance sheets were also now in much better order than they were in 2008.
"The Core Funding Ratio is above 70%, meaning that the sector is much less reliant on short term offshore funding and more reliant on longer term paper and domestic deposits," Toplis said.
"The local banking system does not appear to be having any difficulty in raising funds and corporate balance sheets in New Zealand also look strong. Housing and rural land markets are not displaying the same speculative fervour as was the case leading up to the Lehman default in 2008," he said.
“Extremely low interest rates, and quantitative easing in some jurisdictions, has left the world awash with cash looking for a home.”
Perversely the worse Europe and other places looked, the more cash was flowing to New Zealand because of relatively high domestic yields and, perhaps more importantly, perceptions of economic safety.
"This is why the NZD is strengthening so much and there is, in fact, a very real danger that this process continues in a manner that will eventually make currency strength a bigger threat to the economy than funding costs," Toplis said.
'China wants to lend us plenty'
Savings were increasingly important and it was worth noting that the biggest savings nation in the world was China.
“These Chinese savings are looking for a home and New Zealand will benefit from this. There is already evidence of such with China’s increased participation in recent NZ Government bond tenders," Toplis said.
However the view was not suggesting that a collapse in Europe would not be costly.
“To the contrary, we believe there is too much denial of the possibility of a major sovereign default and we don’t think the effects on confidence and markets will be negligible. This is particularly the case for holders of sovereign Credit Default Swaps." Toplis said.
“More generally, clearly any default process further threatens global growth, which New Zealand is highly leveraged to, particularly via commodity prices. And even as things stand, the threat of default is still weighing, at the margin, on the cost and availability of funding," he said.
“Nonetheless, and in conclusion it is our opinion, translating this into GFC II or Lehman’s II, and all the things that were associated with that, would be a mistake.”