This post from Marginal Revolution has moved me from thinking to writing.
On the surface there appears to be a lot in common with the Irish, Greek, and NZ economies. All three have high net foreign liability positions, liabilities are highly concentrated through banks who are borrowing overseas, all three have experienced some form of housing boom and lift in consumption, and finally all three appeared to have a relatively strong fiscal position before the GFC before moving into fiscal deficits after the shock. And yet (so far) while the Irish and Greek economies and banking systems have collapsed, New Zealand’s has been fine.
There are two major differences that have helped reduce the implied risk on our debt, making New Zealand much less likely to experience a bank run:
- Our banking system is primarily foreign owned (Eric Crampton expands on why this is a good thing),
- We have a freely floating exchange rate – combined with having much of our debt denominated in NZ$ this is useful.
These are important points to recognise. While many commentators are saying we should “peg” our dollar and set up more domestic ownership of banks GIVEN the risks associated with the GFC, I tend to reach the opposite conclusion – namely, the reason why we haven’t suffered as much as these countries has been largely the result of our free floating exchange rate and the fact that a larger economy has a large stake in our banking system.
The terms of trade boost and our proximity and exposure to Asia has also helped, but I would say that the Greek and Irish crises give us a reason to hold onto the status quo – not to chuck it out!