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BNZ economist seeks to calm fears Greek debt default could become new 'Lehman moment', saying NZ banks in better funding position than in 2008

BNZ economist seeks to calm fears Greek debt default could become new 'Lehman moment', saying NZ banks in better funding position than in 2008

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.”

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15 Comments

So, what? The CDS claims that threaten to take down the US/other banks and trigger a dominoe effect, don't matter?!

Not worried about Greece then, how about Ireland and Portugal??

 "...and we know who is holding whose debt,"...the hell you do.

For Topliss to say such bollocks speaks heaps.

All we know is what we have been allowed to know and considering the number one rule being followed by the govts and bankers..." obfuscation is a far better thing than the truth"....we will not be told the truth.....we will however learn what it is when it arrives..

As for the fluff about a Greek default not being a Lehman2 moment....that too is bollocks because it isn't just Greece. All of the Piigs are dominos and after them come the bank dominos......and after them come the other euro states....and then the taxpayers.....

Wolly "obfuscation is a far better thing than the truth"....we will not be told the truth.

You want the truth?

 http://www.youtube.com/watch?v=5j2F4VcBmeo

We don't all have tons of gigs to use up KD..some of us have only a few megs!...no way will I "watch" ...sorry.

Now you have made me really worried  Mr Topliss.... that you are offering patently

unfounded reassurance makes me wonder what you really know

FYI from the European Central Bank President Jean Claude Trichet. He is worried about a Lehman style event. And he's the head of Europe's central bank.

http://www.guardian.co.uk/business/2011/jul/18/eurozone-default-crisis-trichet

 In an interview with Financial Times Deutschland conducted last week, he reiterated that the ECB would not accept bonds from a nation that defaults as collateral for fear of triggering a "Lehmans-style" event in the financial system.

and he fails to comment on NZ doing an Ireland ie where we are forced to support the banks.  It seems quite likely in such a Lehamn II moment that our housing market takes enough flak that is faulters....and our bansk are in it neck deep.....

Its going to take a shot from,

1) The farmers losing out on dairy and exports as ppl cant afford to buy, we say that 3 years ago and it will be worse this time. Their leverage is huge....

2) Other exporters lose out, especially on the high exchange rate as the US etc prints madly let alone loss of business.

3) More mortgagee sales as ppl lose jobs.

4) OZ housing is seriously over-valued and investors see that.....ppl bail...

5) The biggest is china of course thats more like a nuke than lead flying...its economy is growing at 10% per year, so it doubles every 7 years, just how long can they keep expanding when no one is buying?  it cant...

6) Leverage....banks have a lot.....just how big do the losses have to be? 5%? 10%? before coming insolvent?

7) Peak oil...its going to dawn on many ppl in the next few years that there is no way economies can grow and pay down the existing debt....

8) NZ Govn sees tax take shrinks again...so hello job cuts....or higher taxes..

and our banks are in such a great state?

Oh and why does Dr Bollard want seperation of credit and retail banking if there is no issue?

regards

 

 

 

 

There is no depression in New Zealand, we can all keep perfectly calm.

Iain,

Great post

Well said Iain.  Often I find your post too long, and tend to skim them. Not that one.

Just wait till the truth - that they've been screwed - penetrates the disenfranchised mass of the young - from Europe, the Middle East, the US and even here. It'll flick through the social networks in 24 hours.........

It reminds me of a boat we cruised past called (they'd have regretted it if they had had to call for help):  "Light Blue Touch Paper And Stand Clear".

Thanks Iain

Iain,

Nice work. I'm glad you mentioned Luther because i have been working on an update of this myself :-)

https://www.facebook.com/pages/95/192037200848640?sk=info

 

 

 

 

Methinks he doth protest too much

Interesting no meantion of ICELAND?

It would appear citizens in Iceland have some what the right idea?

Is Iceland still on the map of the world?

I guess thats the major difference between Subjects of the Crown compared to soveriegn citizens in a Soveriegn Nation State?

Ya dont need 95 proposals just one action - get rid of the Rothschild Banking cabal and those entities associated with it such as the UN, IMF, World Bank, WTO, WHO, CROWN and all the other associated alphabet agencies and control freaks.

Simple stuff.