Irish and Greek crises: Why is NZ different?

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:

  1. Our banking system is primarily foreign owned (Eric Crampton expands on why this is a good thing),
  2. 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!

  • Well said Matt.

  • Greg

    Hmm.

    The Irish problem is perceived by some to exist, in large part, *because of* the fact that a larger economy had a large stake in its banking system. Namely, Germany. Hypotheken and a few others.

    The same but different applies to the Greek situation: without access to German, French and Italian savings in the first place, the problem would be far smaller.

    Close links to a single larger economy – the “core EU” in these cases – carry their own risks. The “systemic shock” is transmitted as a sharp impulse.

    The lessons I draw from Ireland are (1) governments charge far too small a premium for insuring investors’ risk – perhaps they could consider leaving it to others; (2) diversify properly; and (3) ensure your economy is ‘balanced’: scrutinise all deviations from long-run trend with, as Spike Milligan would say, a powerful scrut. And act.

    That Europe is not an optimal currency area is not a lesson. We already knew that.

    We should also recognise that in banking terms, we were lucky because Australia was lucky. Do we want to go on betting on the Aussies and only the Aussies?

    Nice blog – keep going!

  • Adrian Ratnapala

    … and the fact that a larger economy has a large stake in our banking system.

    And what happens when the housing boom in Oz falls apart?

  • One other point, the Australian banks have much more rigorous lending rules than Ireland’s banks – I can’t speak for Greece here.

    All our dodgy lending was farmed out to the finance companies – which DID fall over. This left the banks less vulnerable.

  • On a tangentially related subject, I’d expect events in Europe to put to talk of a currency union with Australia – one of the daftest economic ideas I’ve heard in recent times.

  • I worked for a financial consultance company and let me tell you that a bank is not a good way even keep your money.

    Banks only want to rip you off and profits from the needs of desperate people who need money quickly.

    Unfortunately there is the other part of people who are not informed about money and appeal to bank because of the simple fact that they don’t know other methods

  • I seriously hope that the housing market don’t plunge, would be dramatic.

  • That would be a night mare if the housing market plunged like that. Kind of scared to think of what could happen.

  • There is absolutely no sign of a housing market crisis in NZ so stop worrying.

  • New Zealand is most safe country for the home builders and home businessmen.Unlike European and western countries the Kiwis economy is different.that is why the financial crisis is not much affected New Zealand.

  • Yes NZ has got a firm banking system which could be possible for the Govt to fight the crisis even if such thing arises.