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.
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