KEY POINTS:
Risk aversion sparked by a fresh round of woeful news from the international banking sector sent the New Zealand dollar to fresh seven-week lows yesterday but the real risk to the local economy lies in the prospect of additional funding pressure on local banks.
Events over the past few days have dashed hopes that the worst of the credit crisis, which has in turn sparked a global economic slowdown, was over.
The financial sector mayhem has ratcheted up risk aversion among currency traders which, along with other factors including the recent gloomy local Quarterly Survey of Business Opinion, have pushed the New Zealand dollar lower.
Yesterday, having opened at US52.26c the kiwi touched a low of US51.70c during the session, its weakest point against the greenback since November. It closed its local session at US53.44c.
Westpac markets strategist Imre Speizer said while risk aversion had been an emerging theme on currency markets for the past two weeks, it had intensified with "a new wave of credit related news that's really headlining the markets this week and providing a new impetus for people to get bearish".
Speizer said that credit default swaps, which represent the cost of insuring debt securities against issuer default and are a good indicator of the credit market, had continued to rise over the past two months but had spiked in the past couple of days.
Tougher conditions in credit markets, which had shown some signs of improvement before the end of last year, are bad news for local banks which rely on offshore wholesale markets for about 30 per cent of funding.
In turn this is bad news for local businesses which rely on local banks for credit.
Anxiety about the availability of credit for local businesses has been growing. Prime Minister John Key was this week reported as saying his Government would consider lending directly to "a limited group of corporates".
With overseas funding channels far more difficult to access, local banks have been turning to the Reserve Bank and its suite of recently introduced "liquidity measures".
The Business Herald understands no local banks have yet used the Government's wholesale funding guarantee to raise funds offshore, but a number of their Australian parents have used a similar guarantee from their own government to do so.
"I would think it was probably inevitable that their New Zealand subsidiaries would be seeking to access some of those funds or raise funds off their own bat," said PricewaterhouseCoopers partner Paul Skillender.
