Thursday, November 18, 2004
Reserve Bank warning over external debt
In a little-noticed press release yesterday, Reserve Bank Deputy Governor Adrian Orr warned that the rise in New Zealand's external debt in recent years stresses the need for policies to promote the soundness of the financial sector.
"New Zealand is a reasonably prosperous nation. We can take on a certain amount of debt with comfort, and in some cases it is sensible to do so. The growth in borrowing in the last decade has not, in itself, raised the odds of a major financial crisis. But if things do go wrong, the losses from such a crisis could be severe - and more so now than they would have been, say, 10 years ago.
"The Reserve Bank's interest in this area stems mainly from two features of borrowing behaviour in New Zealand. First, New Zealand relies heavily on funds borrowed from offshore, and a large and increasing share of these funds is channelled through the banking system...[and] Australian banks now own 85 per cent of New Zealand's banking system assets...
"Second, a great deal of the funds raised offshore end up as household debt. In normal times, households are quite capable of managing their own balance sheets, and their decisions about spending, saving and investment may well be rational. But there is always a risk, albeit small, of a major economic shock that could leave many households without any income to service their debts.
"Ideally, households would have used the recent run of strong growth to build up a buffer against such an event; instead, they have tended to leverage up further and invest more heavily in a few domestic asset classes, especially housing. The result is that a major shock could result in more defaults and heavier losses for banks and other lenders."
In other words, New Zealanders have been using the good economic times as an excuse to spend up big, instead of being prudent and putting some aside for the future. (Household debt is now something like 130% of income - that's a worry.)
In a little-noticed press release yesterday, Reserve Bank Deputy Governor Adrian Orr warned that the rise in New Zealand's external debt in recent years stresses the need for policies to promote the soundness of the financial sector.
"New Zealand is a reasonably prosperous nation. We can take on a certain amount of debt with comfort, and in some cases it is sensible to do so. The growth in borrowing in the last decade has not, in itself, raised the odds of a major financial crisis. But if things do go wrong, the losses from such a crisis could be severe - and more so now than they would have been, say, 10 years ago.
"The Reserve Bank's interest in this area stems mainly from two features of borrowing behaviour in New Zealand. First, New Zealand relies heavily on funds borrowed from offshore, and a large and increasing share of these funds is channelled through the banking system...[and] Australian banks now own 85 per cent of New Zealand's banking system assets...
"Second, a great deal of the funds raised offshore end up as household debt. In normal times, households are quite capable of managing their own balance sheets, and their decisions about spending, saving and investment may well be rational. But there is always a risk, albeit small, of a major economic shock that could leave many households without any income to service their debts.
"Ideally, households would have used the recent run of strong growth to build up a buffer against such an event; instead, they have tended to leverage up further and invest more heavily in a few domestic asset classes, especially housing. The result is that a major shock could result in more defaults and heavier losses for banks and other lenders."
In other words, New Zealanders have been using the good economic times as an excuse to spend up big, instead of being prudent and putting some aside for the future. (Household debt is now something like 130% of income - that's a worry.)
