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Better umbrellas in Aussie if the financial skies fall?

  • January 23rd, 2008

Outlandish as it may seem there is a prospect (I hope tiny but no longer negligible) that a risk I’ve warned about for years could be about to mature. Under Australian law, Aussie banks must repay Australian depositors before they repay foreigners.

We are foreigners. Australian governments have refused to remove the provision, or to include New Zealanders.

That’s why Dr Bollard and before him Dr Brash insisted Aussie banks incorporate companies here (subject to NZ law and not Australian law) instead of letting the Aussie banks just operate branches. The two Governors paid a price in fury and bad-mouthing from the bank bosses. I raised the issue repeatedly in Parliament, partly to warn off Dr Cullen and other NZ politicians anxious to curry favour with Australia.

Local incorporation is only a half protection. It should have been backed with a power US regulators exercise. They can sequester foreign bank assets in the US to meet US liabilities. A conciliatory position would have restricted such a power to assuring NZ depositors of at least equality with Aussie depositors. For practical purposes the NZ Reserve Bank might be able to achieve something similar, simply because our pathetic savings record means we owe more to the Aussie banks than they owe us.

Bernard Hickey’s blogs on the skies falling capture the sentiment driving the market glissade of the past 3 weeks, and offers concrete reasons for it to continue. He points to credit insurers losing their creditworthiness.

It is remarkable how little commentary has focussed on the practical consequences here of a world loss of confidence. See how few are the comments on Bernard’s blogs.

When everybody pulls their heads in, “luxury” spending stops first. When homeowners’ equity cushions become fart cushions their spending cuts will not stop at luxuries. If we’re in the world’s most overpriced houses we could have the farthest to fall. Tumbling house prices will be more important politically than the absurd response of Mr Cosgrove and his predecessors to leaky housing (which has done so much to inflate building costs).

I’d be waking especially early worrying about my budget if I was in the tourist industry. Perhaps the low cost domestic market might improve but there are few winners when confidence evaporates.

Dairying might seem doubly blessed as food demand holds up, until world governments panic into dumping green schemes driving up food prices, like the absurd new corn-into-petrol industry.

But Bernard outlines the prospect of a something more dramatic – a genuine panic leading to frozen markets. From insiders I hear our banks are not immune to the world-wide loss of trust in each other. Ubiquitous complex instruments mean they can not confidently price their own exposures so they know not to trust the financial statements of others.

New Zealanders have not had to think about bank risk for generations (the government rescued the BNZ before punters realized how serious things were) but it is not silly to think about diversifying exposure, even to banks.

Financial meltdown will shift political sentiment away from the incumbent leaders unless they manage to look like safe hands. H Clark will try to out-promise challengers irrespective of Dr Cullen’s capacity to deliver. In one part of the floating voter market there’ll be a hunt for messiahs (in NZ Winston Peters could be resuscitated) as the retired and near retired lose confidence in the adequacy of their investments. 

Small employers could have the biggest effect on the economy. They’ll freeze hiring and building plans as they worry about the profitability of extra machines and employees.

There’ll be a temptation to cater to that political market with a bit of Aussie bank bashing. It won’t be entirely undeserved and they’re used to it. It’s what Aussie politicians do whenever things get a bit slack in Canberra.

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