Crisis to rival 2008 credit crunch if US debt talks fail

NZ Herald

29 Jul, 2011 05:30 PM3 mins to read

New Zealanders are staring down the barrel of higher interest rates and an economic shock to rival the 2008 credit crunch if United States politicians fail to find a solution to their debt crisis in the next few days.

A vote on a package that would raise a self-imposed limit on US Government borrowing was yesterday postponed, leaving a scant few days for politicians to cobble together a workable consensus on the issue.

If a solution cannot be found before a US$25 billion ($29 billion) interest payment falls due on August 15, America - the world's largest economy - will be unable to pay its bills, which many fear could trigger another global financial crisis.

"Should the unthinkable happen and they default we will see some serious dislocations in financial markets and potentially some serious dislocations in US economic growth", said New Zealand Institute of Economic Research economist Shamubeel Eaqub.

Mr Eaqub said the situation was particularly risky because together with Europe - which is also facing its own huge debt woes - the two economies took about 20 per cent of New Zealand's exports.

"These are powerhouses of the global economy so if something happens there then demand for our exports will fall, so will the prices for our goods. It's kind of a double whammy for our exporters with the currency still hanging up there at a very high level."

Westpac market strategist Imre Speizer said his bank did not believe a US default was the most likely outcome but if that did eventuate the US dollar would weaken further, pushing the kiwi dollar well past the post-float highs it has hit in recent weeks. "You'd be looking at a US90c rate."

While that will mean cheaper imported goods such as consumer electronics, it means lower returns for our exporters. "It's fine as long as commodities are also going up with the kiwi dollar which is usually the case," said Mr Speizer, but given the crisis would be focused on the US, it was possible that commodity prices would fall.

But Mr Eaqub said a bigger concern was the effect on New Zealand's ability to borrow money.

Given the US had never defaulted on its debt before, exactly what might follow was anyone's guess, but he believed it was likely New Zealand banks would find it more difficult and more expensive to raise money overseas as proved the case during the global financial crisis.

"In turn that meant you and I couldn't get access to mortgages or business loans."

Mr Eaqub said a US debt crisis would spread to other financial markets. "There could be a huge amount of uncertainty on what your pension fund might be worth or what happens to your retirement savings over the next couple of years."