Bernard Hickey talks with Rod Cheeseman on TVNZ's Good Morning about the euro-zone crisis and what it means for New Zealanders

Bernard Hickey talks with Rod Cheeseman on TVNZ's Good Morning about the euro-zone crisis and what it means for New Zealanders

TVNZ's Good Morning show asked me to try to explain the Euro-zone crisis in an interview with Rod Cheeseman today. The interview is above.

Here's the preparatory Questions and & Answers briefing I sent through to the show's producers in preparation for the interview.

Q. 1. What's wrong with the euro-zone?

A. There's 17 different countries in the euro zone that all have different budget policies and banking systems, but all use the same currency. This means that often the currency is out of synch with what's happening in different parts of the euro zone. For example, Greece, Italy, Spain and Portugal have all grown slower than Germany in recent years and really needed a weaker currency. Instead the sheer weight of Germany inside the euro zone meant the Euro was too strong.

Q 2. So what's going to happen to the euro?

A. There's a good chance it will break up some time in the next couple of years under the intense pressures on national budgets and banking systems because of these imbalances created by the euro. The threat of that break up is causing the European economy to slow down sharply, along with the weight of enormous debt in Southern Europe and the UK. A breakup that saw Spain, Italy, Germany or Portugal leave the euro could wipe out the region's banking system and cause a depression, say many economists.

Q 3. So what does it mean for New Zealanders?

A. Just 7% of our trade now goes directly to the Euro-zone so the impact of a Euro zone recession would not be direct. But there are plenty of indirect effects. The euro-zone is China's largest trading partner and China is the largest trading partner of Australia and New Zealand. China's economy is already beginning to slow down, in part because of the European problems. This will slow New Zealand's economic growth, which will put pressure on employment.

Q4. What does it mean for interest rates?

Interest rates are being cut all around the globe as growth slows and inflation recedes. However, if there was a financial system meltdown in Europe, that may increase the borrowing costs of our banks, and they may pass that on to us in the form of higher interest rates. Our banks are much less vulnerable to that now than they were in 2008 when Lehman collapsed.

Q5. What's the best/worse case scenarios for NZ?

A. The best case is that Europe continues to muddle through and returns to some sort of growth. That will help the global economy recover and take some downward pressure off commodity prices. The worst case scenario is a financial meltdown in Europe, the break up in the Euro zone and an economic depression there, followed by all sorts of political ructions. That would slow our growth further and increase unemployment. That might hurt house prices and push up interest rates.

Q6. Why are our banks less vulnerable than in 2008?

A. They have reduced their use of 'hot' money funding in the European money markets. Instead, they rely now more on long term bonds and local term deposits. Also, banks have put aside more capital as 'fat' in reserve.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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12 Comments

And here's Westpac economist Dominick Stephen's view of what the euro crisis means for New Zealand from July 3. http://www.westpac.co.nz/assets/Business/Economic-Updates/Eurogeddon.pdf

Westpac left out the following

  • A spike in oil prices due to Iran sanctions.
  • Potential conflict in the ME.
  • China continuing to slow.
  • More earthquakes in NZ - God forbid!
  • Returning NZers looking for welfare payments if Oz is badly impacted by a China slowdown.
  • Ever more employable, capable NZers packing their bags.
  • Greenland and Antarctica melting by December - NZ watermelons make waterskiing a compulsory subject at state schools.

Have a nice day ;-)
 
 

"political ructions"....what a soft way of saying murder and civil war will become commonplace...already underway in Greece.
One thing is certain....more pay for pollies in the Zoo...and for the Sir Humphreys of course...
I wonder where all the bankers and other crooks, will decide is a safe place to hide from the mobs.
Another certainty...govt will go a thieving as they opt to steal wealth from savers and survivors....already underway here with the deliberate debasement of the currency.
 
 
 

Excellent points, and that is the real dilemma for the Germans.
 
 

"Germany has become the “rich guy” in a group of friends who are dining at an expensive restaurant. Prior to the meal, everyone assumed that each friend would pay his share of the bill. (Each friend, that is, besides Greece. That dude never pays).

 

But now that the meal is over, almost no one is reaching for his wallet. Greece “stepped out for a smoke,” Spain “went to the restroom,” Italy “excused himself to take an urgent phone call.” Meanwhile, most of the other diners are shuffling nervously through their wallets, mumbling about not finding the credit card they are looking for.

 

And there, at the head table, sits a forlorn Germany — platinum Amex card in hand — dreading the fate he knows is coming his way. That’s why investors are pricing insurance on Germany’s AAA debt at BBB levels."

 

 

http://dailyreckoning.com/like-a-lead-zeppelin/

 

Read Bill Mitchell "Neo liberals on bikes" on how and what Germany did to its people to be where it is today.
Bilbo.economicoutlook.net/blog/
 

In the best case scenario, all the market-rigging by idiotic bail-outs comes to an end, central banks stop printing money, and the recession "we had to have" will correct the severe misallocation of resources that has turned the NZ economy into a basket case in the past decades.
Practically this would mean affordable homes, more emphasis on public transport and environmenally sustainable processes, investment into innovations (rather than dog huts) that materially improve peoples lives etc.
In the worst case scenario things continue with bail-outs, money printing and other distorting rip-offs steering the world and NZ eventually into a crisis of epic proportions.
The truth will probably be somewhere in-between, hopefully more on the side of doing things differently, and not constantly repeating known mistakes.

Pssssst wanna know the future for Noddyland......http://www.telegraph.co.uk/finance/financialcrisis/9392799/Violent-protests-erupt-in-Spain-after-miners-protest.html
....1930s riots will be childlike compared to what's on the cards....Govt has no way out of the hole dug by many years of utterly useless NZ govt. Meanwhile the socialists are planning to buy the 014 farce with a shop full of pork offerings to the many. They stand a good chance of winning because the 99% are sick of seeing the 1% grow fatter of bloated salaries bonuses and perks.
Tweak and Fiddle fail to see that.

Hi Bernard, As a kiwi spending a couple of years exploring Europe having spent 16 months last year looking after a remote rural property in Aude district of southern France and at present spending 12 weeks housesitting again a rural property in County Clare Ireland, I am on a quest to find what the locals think of the global financial crash (GFC). Today I attended the local farm discussion group, which broadly speaking mirrored the gripes and concerns we would be discussing in NZ, we too are having a crap summer as NZ had this year, fields with silage that should have been harvested 3 weeks ago, drop in the milk payments and too much govt interferance.
Quite a lengthy discussion on the cost of money and the on going problems in the banking industry, feeling is that as you stated above interest rates are low and are expected to stay that way for some time to come.
There is a strong feeling of mistrust towards banks in general, particularly with the news now about the libor manipulation.
Bottom line this group of farmers believe they would be better out of the Euro. They may well get their wish in the fullness of time.

"The threat of that break up is causing the European economy to slow down sharply,"
Bernard, do you really think it's the threat of a break up that is causing the European economy to slow down?

No need to worry about the Eurocrisis  -  the debt problems are just a mechanism for the EU to take complete power over the European nations & then become the top superpower.
Where is ll the global policy coming from that dictates our laws & global commerce? - from the EU.   After the Euro,   comes the global currency ....
 
 

As a casual non-expert observer, it seems that all is hapening in Europe is only about moving money/credit about to stave-off immediate issues without really addressing any fundamental problems. The saying about "arranging deckchairs . . . " seems really apt.

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