Bernard Hickey: It's not all Greek to us when it comes to a slump

Borrowers and savers may wonder what all the fuss is about over Greece but it's more important to New Zealanders than many realise.

This week, the Greek Government failed to push through a package of tax increases, spending cuts and asset sales as the price of another debt bailout.

The big fear is Greece can't afford to keep servicing public debt, which could mean a default or restructuring.

The problem for Europe is that a formal default by Greece could trigger another "Lehman moment" for the European financial system. Most of the debt is held on the balance sheets of Greek, German, French and British banks.

Increasingly, it is held by the European Central Bank, which has warned of a crisis.

If haircuts are imposed and it is regarded as a default, American banks, which have sold default insurance polices to European banks, could be hurt. And Greece's contagion could spread.

But a Lehman moment - when banks stop trusting each other - is the biggest fear. That happened when Lehman Bros and AIG collapsed in September 2008 after such doubt they were still solvent that short-term money markets froze.

This is where it gets interesting for New Zealand. Our big four banks owe about 50 per cent of GDP, or $100 billion, to foreign banks on these hot money markets. That means every 90 days our banks have to get the lenders to roll over the debt, which is usually not a problem.

But from September 2008 until early 2009, those banks had to borrow from the Reserve Bank because they couldn't roll over the debt.

It was a close-run thing and the banks were more cautious about lending. Many businesses were forced to pay higher variable interest rates and some riskier business loans were called in.

Our banks have reduced their reliance on these hot markets a bit but Kiwibank has increased its reliance on European hot money markets sharply by borrowing almost $1 billion this year.

This shutdown on global credit markets also made it more difficult for exporters and importers to finance their deals. Trade slumped in the final quarter of 2008 and early 2009.

Those are the major risks for New Zealand, as well as a potentially expensive rise in long-term interest rates as investors hunt for the safest assets globally.

The other uncertainty is the risk of a US government debt default, which could happen from August 2.

So when borrowers and savers watch the latest Greek riots, they should also think about a potential rise in borrowing costs and a possible slump in the global economy.