Single currency gaining speed

The debate over New Zealand joining a single currency with Australia and having a single banking regulator is presented as a matter of choice for New Zealand.

Prime Minister John Key has kept the debate simmering, wondering aloud whether New Zealand would be better off joining up.

The widespread view within New Zealand's economic policy-makers and politically is that joining the Australian dollar, which is what this really means, would mean New Zealand sacrifices its economic sovereignty.

Key's view is not widely shared within Treasury and the Reserve Bank.

Joining the Australian dollar and handing over regulation of our banking system to the Australian Prudential Regulation Authority (APRA) would mean Australians would decide our interest rates and banking safety.

Their priorities would come first in any crisis and any divergence of our economies could prove disastrous for New Zealand as we laboured on with higher or lower interest rates than we needed.

But is this really a matter of choice? What if the Australians told us to join their currency and give up our own banking regulation? That may be the subtext behind John Key's recent comments after his one-on-one meetings with Prime Minister Kevin Rudd.

The background to this renewed Australian interest in our economic affairs has a recent history that is not widely known in New Zealand.

In the past nine months the Australian parents of our banks have been forced to send more than NZ$10 billion across the Tasman to support ANZ National, BNZ, ASB and Westpac, including about $3 billion of precious equity capital. Westpac NZ's borrowings from its parents rose by $2.5 billion.

ANZ National's borrowings from ANZ rose more than $6.5 billion in the last year.

During the depths of the financial crisis from September to March our banks were unable to raise funds on international markets in their own right.

Also our banks have booked much larger bad debt losses than their Australian parents relative to their size because of the depth and length of the recession. Australia has not technically had a recession.

Luckily our banks were able to keep lending because these loans and equity injections kept coming.

But there is a limit. It's clear in the first page of Westpac NZ's General Disclosure Statement the Australian regulator will not let Westpac's parent expose more than 50 per cent of its tier one capital to its New Zealand arm.

This rule is known as APS 222. At various points in the crisis the phrase "limits on APS 222" was bandied around in the banks' boardrooms in New Zealand.

Essentially, Australia's banking system and its Government underwrote our economy, thanks to Rudd's wholesale and retail guarantees for the parent banks.

Just as any small loan is a problem for the borrower and a very large loan is a problem for the bank, New Zealand can become a problem for Australia if our banks keep coming back for handouts.

These risks are significantly reduced for the Australians with a single currency and single regulator.

We may not have a choice if we continue to borrow heavily. Key's interest in a single currency may be more than just a passing one.