By Gareth Vaughan and Alex Tarrant
The New Zealand Bankers' Association (NZBA) says this country's banks are "robust, well regulated and well capitalised" against the backdrop of global financial market tensions, as Finance Minister Bill English travels to the US to get an update on what direction global economic policy makers are heading in.
Tensions in global financial markets have risen in recent weeks as it becomes more likely the Greek government will have to default on its debt, owed largely to European banks. Ratings agency Standard & Poor's has just downgraded Italian government debt, leading to renewed concerns that global wholesale funding lines, which New Zealand's banks rely on for a third of their funding, could tighten as markets react negatively to the developments.
English and Prime Minister John Key have warned that financial markets may lump New Zealand into their list of small, highly indebted nations they do not want to lend to if the European crisis were to blow up further. The difference between New Zealand and the European periphery nations, however, was that a large proportion of New Zealand's international liabilities were held by the private sector, while a smaller amount was public debt - something English will be pointing to global financial market participants throughout his trip.
Key warned yesterday that the overhang of private debt in New Zealand could still lead to problems for New Zealand, as financial markets, as well as Standard & Poor's, were increasingly lumping private and public debt together due to government tendencies around the world to bail-out private sector financial institutions.
'Our banks are strong'
In a brief statement, the NZBA, whose members include ANZ New Zealand, ASB, BNZ, Westpac and Kiwibank, said local banks were well positioned and strongly capitalised.
“Our banks’ strength lies in the fact that they are well capitalised and regulated,” NZBA chief executive Sarah Mehrtens said.
New Zealand banks all meet international standards, she added, and Reserve Bank requirements based on international agreements.
"The capital adequacy ratio mandated by the Reserve Bank is 4% for tier one (capital) and 8% for total qualifying capital. On average, New Zealand’s major banks’ capital holdings exceed the required tier one and total qualifying capital ratios by 5.96% and 4.80% respectively," said Mehrtens.
A spokesman later confirmed that meant the ratios were 5.96 and 4.8 percentage points above the respective requirements, and that this was for the four major banks, ASB, ANZ National, BNZ and Westpac.
“Our banking system is robust and well regulated, and served us well during the global financial crisis. Our banks did not get caught up in the debacle that many of the international banks are now facing. We need to stay focused on striking the right balance between lending and growth on the one hand, and safety on the other,” Mehrtens added.
Asked if there was any particular reason the NZBA had released the statement today, a spokesman said the release was designed to "provide some useful background" to Finance Minister Bill English and Reserve Bank Governor Alan Bollard’s trip to the United States.
English leaves today for New York and Washington DC, where he will visit the World Bank and International Monetary Fund, and meet Federal Reserve chairman Ben Bernanke. English will attend the World Bank board of governors' annual meeting and hold discussions with business, financial market and government representatives.
“This visit is timely, in light of economic and financial market events around the world in recent months,” English said in a statement.
“In particular, ongoing concern about debt in Europe and the United States reinforces the need for New Zealand to press on with its programme of building faster growth around savings and investment, with less reliance on borrowing from foreign lenders. I’m looking forward to meeting a number of other finance ministers at the World Bank including the Chinese Finance Minister Xie Xuren," English added.
“Given the economic uncertainty and volatility we’ve seen in Europe and the United States this year, it’s important that New Zealand continues to engage with its trading partners and share ideas on managing common challenges.”
The Reserve Bank generally doesn't comment on Bollard's movements.
Expecting pessimism to rule
Speaking to interest.co.nz before he left for New York on Tuesday, English said he expected the mood among EU and US policy makers to be pretty gloomy. Discussions would be helpful for the government in terms of getting an idea on the directions those policy makers from New Zealand’s largest trading partners were looking to take. English was most interested in policies that would affect the currency.
“We don’t have a lot of influence on the US or EU policy makers, but it is very important to listen to them so we can get a measure of how likely it is that they will solve those problems and whether it makes any difference to us what solutions they come up with,” English told interest.co.nz.
There were people and organisations who the government needed to keep up to date, with English doing the rounds of the credit rating agencies and the IMF to make sure the interested parts of financial markets were clear on where New Zealand stood, he said.
English was also looking forward to meeting Bernanke.
“We’re interested in where he’s headed with the policy that affects us directly, and that is focused mainly on the currency. I doubt that he’ll say too much that’s surprising, but it’s always good to get it from the horse’s mouth,” English said.
He would also meet the Chinese Finance Minister, with whom similar issues would be discussed.
“Although they’ve got a different currency problem – we’ll find out how much they’ll let theirs appreciate and how much Bernanke’s going to depreciate the US dollar, basically that’s what it comes down to for New Zealand,” English said.
“Both of those are big drivers of our economic prospects, and that’s why I’ve been keen to meet with the main US and Chinese policy makers,” he said.
“It influences our policy because we can make some judgments about what we expect the impacts will be, and that’s why it’s worth talking to the people actually making the policy in the US and China.”
'Still worries about NZ's private sector debt'
Prime Minister John Key at his post-cabinet press conference on Monday said the visit was a standard one for the government. Although the government was in a good shape financially, financial markets were still concerned about New Zealand's private sector debt, he said.
“[Bill English will] be there to take the temperature of the international markets,” Key said.
“What we know is that the effect of the European debt crisis and the implications of the debt ceiling not being initially met in the United States has really sent quite a shot across the bow of the international financial markets, and that’s had some implication on our capacity to raise money,” he said.
“My understanding is that’s coming back. From New Zealand’s point of view the good news is the Debt Management Office pre-funded very significantly its requirements, so there’s no great pressure on us. Markets were better for us late last week than they were in the early part of the week. It’s just a matter of them continuing to test the waters and talk to international lenders.”
From the New Zealand government’s position, the Crown’s accounts were in “very good shape, and I think that would be acknowledged by most people looking at New Zealand,” Key said.
“We’ve got a clear plan to get back into surplus, our debt levels are considerably lower than the OECD average – about a quarter of that. We’re fairly well provisioned for the Christchurch earthquakes, our growth targets look robust and strong, in fact our domestic economy’s performing a bit better than people expect,” he said.
“There’s just no getting away from the fact that we have an overhang of this private sector debt that still worries the international markets, and so that’s one of the reasons why some rating agencies take a different view to others. When they look at the overall picture they still don’t like our net external liabilities on a total public-private perspective,” Key said in relation to Standard and Poor's move to put the government's credit rating on negative watch last November because of a global trend of governments bailing out companies in the financial sector.
(Updates with comments from English, Key, video of Key).