Bernard Hickey: Euro debt crisis will affect us too

The panic in global financial markets in recent days is a frightening reminder of those tumultuous times after the collapse of Lehman Brothers in September 2008.

As then, the fallout for New Zealand is likely to be not too serious, assuming of course the financial collateral damage is contained largely to Europe.

That is a reasonably large sized "if". Again, this is all about debt and how it is repaid and serviced. Most of the developed world, including Australia and New Zealand, went on a debt-fuelled binge from 2002 to 2008.

The first wave of the crunch was a private banking crisis as the losses on this toxic debt wiped out shareholders in the "Too Big To Fail" banks. The British and American government bailouts shifted the toxic waste from private balance sheets to public ones.

Governments borrowed heavily to support their economies. Now all the delaying tactics have come home to roost in a series of sovereign debt crises. Part of the issue is many European banks have not taken their own balance sheet hits for all the bad debt they held. They have stopped trusting each other again.

Investors and voters are sceptical about the ability of governments to cope.

There is a real risk Germany either pulls out of the euro or ejects the laggards such as Greece, Spain and Portugal. The problem for the Germans and French is a breakup and the inevitable debt defaults would slam their banks.

Luckily for New Zealand and Australia our banks don't hold much of the toxic debt. Our economies are healthier and are also now joined at the hip to the strongest growing large economy in the world: China.

But there will be fallout for New Zealanders. The eurozone is our third largest trading partner. European banks have lent large sums to our banks over the years and getting new loans may not be so easy.

The end result for New Zealand is interest rates will keep rising. The de-leveraging happening painfully in Europe and the US will hit us too.

It may take longer and be less convulsive, but it will press down on growth rates and asset prices for years to come.

bernard.hickey@interest.co.nz