Bernard Hickey details the key news overnight in 90 seconds at 9 am in association with Bank of New Zealand, including news that German officials have signaled that Greece may have to restructure its debt.
This is the first official recognition that Greece's bailout plan is not working and it is reaching a point where it can't service its debt any more. See more here at Reuters.
The fear is that those who hold Greek debt will have to take 'haircuts', where the value of their bonds is rewritten down, forcing pension funds, banks and others to recognise losses on the debt.
All the bailouts in Greece, Ireland and soon Portugal are designed to fend off the spectre of debt restructurings.
Greek bond yields rose as investors priced in the risk of either a default or a haircut. Greek 2 year government bond yields hit 18.4%, while 10 year yields rose to 13.4%, meaning international bond investors think Greece is riskier than Bridgecorp...
Ominously, Spanish bond yields rose too.
Spain is the big Kahuna of the European Sovereign Debt crisis because its economy is much bigger than the first three PIGs (Portugal, Ireland, Greece). Spanish yields had been relatively stable through the latest Portugese crisis, giving some hope that the contagion would not spread to Spain. Spain has also been reassured by China that China would continue to buy its bonds. So a rise in Spanish yields is unsettling.
All this matters for New Zealand because further turmoil on global financial markets makes it more expensive and difficult to roll over our short term foreign debts (ie less than 90 days), which are currently worth around 50% of GDP. The IMF and others have warned we are vulnerable if there is another Lehman Brothers style crisis in financial markets.
Meanwhile, the New Zealand dollar rose overnight to a high of 79.5 USc, the highest since the level hit on November 6 last year of 79.6 USc. That was itself its highest level since March 2008, just before the Global Financial Crisis hit, which pushed our currency down to a low of 49 USc in March 2009. See the interactive currency chart below.
The New Zealand dollar is surging thanks to an historic shift upwards in commodity prices and because huge capital inflows are driving up the currency. The government is expected to borrow as much as NZ$20 billion this fiscal year, with more than 60% coming from offshore creditors.
Also, about NZ$15 billion of foreign reinsurance money is flooding in to pay for earthquake damage suffered in Christchurch.
On top of that, banks are also out lending again in the mortgage market. Some of that borrowing is funded offshore from foreign borrowing. Some banks are offering 95% home loans again and the March 10 cut in the Official Cash Rate has sparked new activity. Kiwibank cut its 6 month mortgage rate yesterday to 5.4%. See our article here.
Reserve Bank figures out late yesterday show mortgage approvals have averaged over NZ$800 million a week for the last four weeks, the first time this has happened in 18 months. Mortgage approvals are growing at their fastest annual rate since December 2009. See our interactive chart on mortgage approvals here.
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