A few weeks ago, I posted an article on the Reserve Bank of New Zealand’s (RBNZ) quarterly statement on monetary policy, which contained a blunt warning on Australian bank funding costs.
Yesterday, the RBNZ Governor, Alan Bollard, delivered an interview on Radio New Zealand cautioning that the impending European debt crisis could adversely affect Australian and New Zealand banks’ access to credit and crimp both nation’s economic growth.
Bollard said the Reserve Bank was “tracking through” what Europe’s debt troubles might mean for New Zealand.
One such “track” was: “Could we see the Europeans make such a mess of trying to sort out their financial contagion that the markets remain very, very fragile and remain reluctant to offer medium term funding for even good countries and good banks like Australia’s and New Zealand’s.
He said it already become difficult for Australasian banks to get medium term funding in European markets.
“I don’t think that’s a problem at the minute, because they are very well-funded, but if it were that to continue through to next year, then it could become a problem at some stage, and that would certainly slow down lending and slow down growth in New Zealand,” he said.
Australia and New Zealand effectively share the same banking system, with Australia’s Big Four banks comanding around a 90% share in New Zealand. And given the similarities in our banking systems, it is no surprise that both nations have engaged in a similar foreign funding splurge, whereby each nation’s banks borrowed large sums from the international wholesale capital markets and chanelled these funds primarily into housing (inflating values in the process).
The extent of the Australian banks’ offshore funding is shown clearly by the below chart:
The situation is similar in New Zealand:
And most of this offshore funding has been directed into housing lending in Australia:
As well as in New Zealand:
As noted last time, the Trans-Tasman banks have an inherent weakness in that their ability to refinance their offshore borrowings rests with the willingness of foreign investors to continue to lend them money. But in times of heightened risk-aversion – such as the impending European debt crisis – foreign investors can become nervous and less inclined to continue extending credit, which has the potential to leave our banks, house prices, and broader economies exposed to a sudden funding freeze.
Dr Bollard also raised concern at the potential collateral damage to China from a European meltdown, which could feed back into both the Australian and New Zealand economies:
“The other channel that we are looking at and we are concerned about is that if European growth really slowed down, as it looks like it is doing, then ultimately that could really affect China and other east Asian countries.
“They (China and east Asia) have been a bit de-coupled from all of this so far, but as we found out in late 2008, no one is really decoupled,” Bollard said.
Bollard said China’s exports fell away sharply in the wake of the 2008 financial crisis.
“We would not want to see that happen again. If it did it, it would hurt commodity prices, it would hurt Australian growth and it would hurt New Zealand growth.”
Indeed, a prolonged bank funding freeze and/or a hard landing in China are arguably the two largest downside risks for the Australian and New Zealand housing markets and broader economies. Again, I can only prasie the RBNZ for acting as the conscience for its far less forthcoming Australian cousin.
