KEY POINTS:
World market disruptions won't be giving the Reserve Bank headaches yet, but despite hopes that action by the US Federal Reserve has turned markets around, there may be worse to come.
Central banks have been pumping out billions of dollars this week, providing capital to keep money markets
going as fear and suspicion spreads. The fire sale of Wall Street's survivor of the Great Depression, investment bank Bear Stearns, to JPMorgan Chase is the latest cautionary tale of a big institution brought to its knees.
That sparked speculation that others were in trouble, with rumours about Lehman Brothers sending its share price plummeting.
Stock markets around the world have plunged, and commodities such as gold and oil have skidded from record highs as funds shifted money into other assets, as fears of a US recession fail to go away.
Hindsight is a wonderful thing, and often central banks' decisions at key points fare pretty poorly when looked back on. But, barring any disasters yet to play out, the US Fed played a key role in turning around sentiment this week.
The Fed cutting its benchmark interest rates by three-quarters of a percentage point to 2.25 per cent provided a boost, but was less dramatic than some had expected.
More importantly, the Fed also decided to let securities firms borrow directly through its "discount window", swapping assets such as mortgage bonds for easier-to-shift government bonds or cash.
The Fed also relaxed capital rules for giant home financiers Fannie Mae and Freddie Mac, and agreed to underwrite JPMorgan's purchase of Bear Stearns at US$2 a share.
"What happens if a financial institution fails, often a relatively easy way for the regulators to deal with it is to get someone to buy it," said director of Massey University's Centre for Banking Studies, David Tripe.
The Reserve Bank won't be worried about contagion. No one's in that situation in New Zealand, and in fact more than a dozen finance companies were left to fail aside from some tightening up of regulations.
And despite the meltdown in world credit markets, economists do not expect any interest rate easing by the Reserve Bank until late this year or early next year.
Because of the extent of dependence on international financial markets for the funding, the main risk is that pressure will continue through New Zealand banks' funding costs amid competition for liquidity which is drying up.
Since August, the cost of funds on money markets has risen significantly without any further tightening from the Reserve Bank, whose benchmark rate is now six percentage points above the Fed's.
Most New Zealand banks' assets consist of housing loans, loans to businesses and other New Zealand assets. Despite a very high level of home lending, banks spread their risk throughout the country and over borrowers with different occupations.
"Funding will get a bit more expensive as a result of fallout in international markets, but in essence, however, increased funding costs can be passed on to borrowers. If that puts the borrowers into trouble, that's something of a second stage effect," Mr Tripe said.
While the housing market is slowing, the spectre of mortgagee sales throughout the neighbourhood is unlikely, he said.
"The important thing is to talk to your bank. If it's just a matter of mortgage affordability, that doesn't need to be a major problem.
"There's a lot of work doing mortgagee sales, and if you start doing a lot of them, it's incredibly time-consuming. The people who you will sell up by mortgagee sale are the people who are so busy hiding from you (the banks) that they won't talk to you."
The large amount of Australian ownership of New Zealand banks may make them slightly riskier than if they were New Zealand-owned, with credit supply problems if the parent banks get into difficulties.
On the plus side, Australian banks have had very little in the way of bad and doubtful debt expense, and most of their business is domestically focused so they have generally not as much exposure to the complicated and risky deals that have been popular in the US.
Nevertheless, the top five Australian banks' potential problem exposures have been estimated at about A$5.5 billion ($6.3 billion).
In addition, the Australian economy is showing little sign of slowing, with falling levels of already low unemployment and little chance the central bank is going to drop rates.
While the high level of Australian ownership of banks is an issue, another concern is the exposure by New Zealand businesses to troubled Australian-owned parents.
Finance company Strategic Finance says it is business as usual despite plunging shares in parent Allco Hit and an apparent implosion at group parent Allco Finance.
Allco is one of several high-profile Australian victims of the global credit squeeze, forced to sell assets to repay debt. In a similar position is ABC Learning Centres, which operates childcare facilities in New Zealand.
Also in trouble is Centro, which has shopping centres in New Zealand, and tourism and finance company businesses related to MFS Ltd.
However, the main problems for New Zealand are closer to home, including sluggish demand, high costs, and high general inflation.
Some economists have dusted off fears of a recession, with Finance Minister Michael Cullen acknowledging it was a possibility before he was told off by business lobby groups and opposition politicians, as if it would become some self-fulfilling prophesy.
"Given drought, given the international financial turmoil, given the credit squeeze, given the housing market coming off, it would be foolish to rule out the possibility that there could be two successive quarters of very small negative growth at some point in the next year or so," Dr Cullen said this week.
"But we are not expecting to see the economy going through the floor."
- NZPA
