By Bernard Hickey
Borrowers and savers may wonder what all fuss with Greece is about.
It's actually more important to New Zealanders than many realise.
Here's why.
This week the Greek government failed to push through a new package of tax increases, spending cuts and asset sales. This latest austerity plan is being demanded by the European Central Bank, the International Monetary Fund and the rest of Greece's fellow members of the Eurozone as the price for another bailout.
The big fear is that Greece simply can't afford to keep servicing its public debts, which would mean it has to default on its debts or somehow restructure them. This could involve an extension of the repayment terms or some form of 'haircut' for borrowers where they agree to forgive some of the debt and have to book losses on the debt.
The problem for Europe is that a formal default on Greece's debt could trigger another 'Lehman moment' for the European financial system. Much of the Greek government debt is held on the balance sheets of Greek, German, French and British banks. Increasingly, it is held by the European Central Bank itself, which has warned of a crisis if Greece is allowed to default.
If haircuts are imposed and it is officially counted as a default, it could also hurt American banks, who have sold default insurance polices to European banks.
The worry is that if Greece defaults, concerns about defaults will also spread to Portugal, Ireland and Spain, which is the 'Big Kahuna' of the European debt scene.
A 'Lehman moment' is the biggest fear of all. This is where banks stop trusting each other. This is what happened when Lehman Bros and AIG collapsed in September 2008. There was so much doubt about whether banks were solvent because of the mountain of derivatives hidden within the wreckage of these institutions that short term money markets froze.
This is where it gets interesting for New Zealand. Our big four banks owe around 50% of GDP or NZ$100 billion to foreign banks on these hot money markets. That means that every 90 days our banks have to get the lenders to roll over the debt. Usually it's no problem at all and the only thing that changes is the price.
But from September 2008 until early 2009 New Zealand's banks had to borrow from the Reserve Bank because they couldn't roll over that debt.
It was a close run thing and during that time our banks were much more cautious about lending. Many businesses were forced to pay much higher variable interest rates. Some of the riskier business loans were called in.
Our banks have reduced their reliance on these hot markets a bit, but not much, and Kiwibank has actually sharply increased its reliance on European hot money markets by borrowing almost NZ$1 billion from European banks this year that has to be rolled over every 90 days.
This shutdown on global credit markets also made it much more difficult for exporters and importers to finance their global trade deals. Trade slumped in the final quarter of 2008 and early 2009.
Those are the major risks for New Zealand, along with a potentially expensive rise in long term interest rates as investors globally hunt for the safest assets.
The other uncertainty hanging over global markets at the moment is the risk of the US government debt default. That could happen from August 2.
So when borrowers and savers see the latest Greek riots or pictures of stressed stock market traders they should also think about a potential rise in borrowing costs and a possible slump in the global economy.
37 Comments
Good article I thought. What do you think the interest rate will be for the following scenarios for mortgage holders as I assume credit will be harder to come by:
1. Greek default freezes the markets for loans?
2. A soft default?
What will happen to Kiwibank if they are getting a lot of hot EU money? Will they go broke and if so will the Govt secure their loans or do we already own them?
Do you think there will be a chance interest rates will hit double figures in the coming year at all? If so I pity those on $300K mortgages. There are heaps of these around where I live in the North Shore of Auckland.
I would assume in the short term the RB lends banks the money...if they cant get any "hot " money at any cost.....is there huge immediate effect? I dont think so , but some weeks later? If the RB keeps them on life support maybe no huge effect....
Otherwise If NZ banks can only get "hot" money at say 10% then I'd assume our mortgages go to 12% really fast....deposits also approach 10% really fast....?
Then the ongoing effects, businesses are in deep deep doo doo, their borrowings also go throught the roof and bankruptcy litters the business landscape....and once you are un-employed you cant pat the bils even if the interest rate is 2%.....you are screwed, forced sales
$300k mortgages, when i got my mortgage I made sure I borrowed conservatively, I knew I could survive 10% even 20% without undue hardship, I saw friends in 1993 etc (in the UK) go to the wall at 19%, I wasnt risking that.....now Im pretty sure many ppl have borrowed way more and as you say will be the first to go if we see 15%+ rates....
"soft default" the worry or focus should be the CDS market I suspect. From what I can read the EU banks and I assume hedge funds/investors etc have taken out lots of SCD's with US banks betting on a default, these sums are way bigger than a soft or hard Greek default....so even if the greek default is wrapped in cotton wool and extra softener used, the CDS's will be a sledge hammer on the US....
Kiwibank, I assume they go to the RB and borrow like everyone else....
This is going to be an interesting discusion IMHO.....I will follow it with great interest....maybe some collective wisdom will emerge and we'll see into that crystal ball, we sure need to.
regards
I still dont understand why a default isnt a default.....if Im an investor and Im asked to roll over my terms, lose capital or forgo interest to me that is a default.....just because the Pollies decide it isnt doesnt make it so.......it seems to be Pollies etc are playing loose and fast with the "law". I ive taken out a CDS then I would be even more p*ssed if its not classed as a default.....the problem for me is there is a legal or financial framework if you will of how you do things, trust etc, break that and the entire system is now un-trustworthy.
NB why is NZ banks borrowing off the Govn that bad? sure in effect I can see we the voter become the patsie....if a bank collapses....but if it doesnt go that far?
My biggest worry though is a Lehman moment...where for some weeks or maybe months the entire banking/financial system locks up and eftpos doesnt work etc.....that could get ugly really quickly.
NB2 why is kiwibank borrowing hot money at all? this seems to be a decision of the board to keep expanding at any cost/risk....they should be wrist slapped....
regards
I'm guessing you're not managing a bank or a billion dollar fund so you probably dont have to worry about when the insurer declares that a default has occured re the CDS' they've issued, as they aren't available to the likes of you or I anyway.
And the size of the payout that would occur from these unknown numbers of CDS' out there if a default were to occur, which would probably cause more defaults and require more CDS' to be paid out on, would probably be more than any money the issuer has available, thus they'd have to get a government backstop to even stand a remote chance - like AIG already did. So it all comes back to what the tax payer will stomach.
How much money will the tax payers of the west allow their governments to continue pumping into a financial system thats serving the interests of the biggest banks and corporate giants above anyone else.
"dont have to worry" of course I/we do.....just how the market works or not has a huge impact on evereyone's life.....what I am saying is the past practice or laws or how things work can be set aside on the fly by Pollies when they choose, that frankly is the path to hell IMHO. the end result for an investor who cant get some considerable comfort in lending is why should they lend? if they refuse I/we could be worse off for it.
regards
So many worries steven....you have 'Hickyitus'! according to Gummy...default I think is declared by Blackrock or a bunch of swine in the hedging business..if they rort their investors they risk a loss of confidence as you say...but if the payoff is a hundred billion on the side...all bets are off...the whole stinking corruption of puss and poison managed by the greatest criminals on the planet...don't ya just love it...
Kiwibank know the govt must bail them out...so they borrow and borrow and borrow...who gives a rat's arse.
Your 'Lehman moment' will not happen until the trigger is pulled by the one who stands to win big time...or lose the least....who knows.
Not just Kiwibank though...all the banks are in effect covered by us the voter.
"Lehman moment" while it could be a pulling of a trigger (and I'll bet there are ppl out there betting on it and trying to make it happen) Im not so sure and in fact pretty sure it wont be a positive/direct action......
Its interesting to watch, except of course Im in the same test tube.....
Gummy seems to love GS, I assume he has lots of $ with them and with a default he gets wiped out....he seems determined to look on the positive side no matter what....like a turkey voting for Xmas IMHO.....
regards
Hickeynesian Economics is even gloomier than Malthusian , steven .
........ hey , and don't you worry aboot our man Lloyd at GS , the SEC will never make him a bank fine ......
...... best nibbles around , at the GS investor presentations , IMHO . They certainly don't serve muffins . Never seen you there .
regards
Im only a poor single income worker Gummy even Muffins are a luxury.
Investing is something I do myself....ive seen how bad the so called professionals are at it and Ive lost with them. Ive bailed out of shares a year ago....and my ex-shares have dropped about 15% in that time....so Im quids in...cleared a nice piece of debt....wosrt case I can go back to the bank and borrow it again if there is the opportunity.
regards
"Not just Kiwibank though...all the banks are in effect covered by us the voter."
I'm not so sure they can/will bail out banks a second time round. A few things are different now:
1. The public weren't too happy about bailing out SCF. But that'll be small fry compared to the main banks. It may be politically difficult.
2. The pollies know what happened to Ireland. And I think they are smart enough to understand the critical failing was when the government guaranteed the banks.
If you want genuine government guaranteed deposits try Kiwibonds or the Public Trust. Both really are guaranteed.
So if the Banks were borrowing from RBNZ in 2008, then were the RBNZ doing this from their own reserves, or were they printing money?
Presumably this act gives our banks a bit of breathing space if Eurpopes financial system collapses, but next time there won't be a recovery.
Maybe I will delay emptying my account for now.
Isn't Bollard trying to set up that the banks can fail, but start operating again the next day. Running out of time though.
You are probably right, but people will still need a currency just to survive day to day until a replacement appears. Perhaps direct bartering will become the norm, but what the hell are most of the 1.4 million people in Auckland going to barter.
He is (was?) but I think its some time off.....I dont even think the banks have agreed to do it yet let alone how and its a big job I suspect, in which case we could be 2 years off something like that...
Hence skills and the tools to use/deploy them are more imprtant than gold IMHO...
regards
I think you are wrong on 2 levels,
1) you are assuming banks will fail as opposed to freeze...so cash is no longer a viable tender, I dont concur....if its that bad the only viable tender frankly is lead. What i expect is a disruption of noticable magnetude...for some weeks....then the banks will function again as tehy un-freeze.
2) Gold is the way to keep your wealth through an event and not to survive in it.....I want to survive the event, I have no wealth anyway so locking it into gold etc makes no sense.
If we are back to a gold standard the changes are and will be so radical that we wont have much of anything anymore anyway.....at that point the skills you have and the tools you can deploy count more than gold because tehre are re-newable.
regards
I can not see what is wrong with printing money and lending it out in contrast to borrowing money and lending it out. Some say the former is inflationary but surely it is no more inflationary than borrowing money. With printing money the interest goes back to the people while with borrowing money the interest goes back to overseas lenders thus increasing our foreign debt. As long as the printed money is only lent for productive purposes and not consumption it is a win win situation
I tried to help you Patricia but I was wasting my time. Printing and not borrowing is to the foreign bond buyers a signal not to buy your bonds and to sell your currency....your tricky move would see the Kiwi$ drop to about 10us cents....your petrol would cost over $10 a litre!
Add to that the flight of billions of dollars as the market caught wind of the dirty trick to come.
You also fail to see there would be no control over the printing once it started as the pollies battled to have "productive" investment in their electorate....make work it's called....great just before elections....guess why?
That is exactly why I asked the question and probably the main reason why the NZD tanked in 2008. I looked at M0 on the chart here, and it certainly looks like they hit print button. Would love to have that confirmed though as I wasn't watching things as closely then.
Banging your head against a brick wall there , Wolly ..... we had this same conversation with Patricia just a week ago ........ and she still doesn't seem to grasp the gist of our message .........
....... gotta be a paid up member of either the Greens or the Labour Party !
All over....nothing to see here....move on....yeah right!!
http://bbc.co.uk/news/world-europe-13830466
Another good article. This one is about the protestors.
Beware of Greeks Bearing Bonds
As Wall Street hangs on the question “Will Greece default?,” the author heads for riot-stricken Athens, and for the mysterious Vatopaidi monastery, which brought down the last government, laying bare the country’s economic insanity. But beyond a $1.2 trillion debt (roughly a quarter-million dollars for each working adult), there is a more frightening deficit. After systematically looting their own treasury, in a breathtaking binge of tax evasion, bribery, and creative accounting spurred on by Goldman Sachs, Greeks are sure of one thing: they can’t trust their fellow Greeks.
Fairly long but interesting article on Greece.
http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010?currentPage=1
The question of default is a moral one. Should a country pay it's debts, and if so whom in that country should carry the liability. Unless Greeks unite to face the problem things seem to end badly.
Greeks may decide they personally do not want to pay and eventually this will translate into political stalemate and default. If this happens the ECB will lose control of the situation.
It is for these reasons a default may happen, rather than any technical need for a default.
This seems appropriate:
"The State is the great illusion where everyone thinks they can live at the expense of everyone else." -- Frederic Bastiat
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