Financial Armageddon!!

[eri]

nervous euro

Italy debt fears: Nervous Italians start to funnel money across the border

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12143472

[Chris W]

nervous euro

Italy debt fears: Nervous Italians start to funnel money across the border


https://www.nzherald.co.nz/business/...ectid=12143472

Deposit run on Italian banks could lead to liquidity pressures on Italian banks.
Liquidity pressures on Italian banks could lead to credit tightening in Italy.

Also note that:
1) Italian sovereign debt was downgraded by Moody's to the lowest investment grade rating. 25% of this debt is held by non Italians (most likely other European banks, bond funds, money market funds). If this is downgraded to non investment grade (i.e junk), there are likely to be some market price adjustments and the impact of mark to market accounting on the banks. Could affect other money markets in Italy - commercial paper financing availability and funding costs, bank funding availability and funding costs etc
2) ECB will stop buying Italian sovereign debt at end of 2018, so who is going to buy and what return will they want to compensate for the investment risks? Once again, this could have an impact on the mark to market accounting on the banks ...

Potential for market disruption and possible impact on global liquidity (and the possible flow on effects on bank funding in Australia and New Zealand, and the possible flow on effects of banks willingness and ability to continue to extend credit in their respective economies) ...

[flyernzl]

Might make my planned trip to Italy next year cheaper?

[Davo36]

Deposit run on Italian banks could lead to liquidity pressures on Italian banks.
Liquidity pressures on Italian banks could lead to credit tightening in Italy.

Also note that:
1) Italian sovereign debt was downgraded by Moody's to the lowest investment grade rating. 25% of this debt is held by non Italians (most likely other European banks, bond funds, money market funds). If this is downgraded to non investment grade (i.e junk), there are likely to be some market price adjustments and the impact of mark to market accounting on the banks. Could affect other money markets in Italy - commercial paper financing availability and funding costs, bank funding availability and funding costs etc
2) ECB will stop buying Italian sovereign debt at end of 2018, so who is going to buy and what return will they want to compensate for the investment risks? Once again, this could have an impact on the mark to market accounting on the banks ...

Potential for market disruption and possible impact on global liquidity (and the possible flow on effects on bank funding in Australia and New Zealand, and the possible flow on effects of banks willingness and ability to continue to extend credit in their respective economies) ...

OR ECB just keeps giving them money and the can gets kicked down the road...

[Chris W]

For sake of clarity - the area that is the key cause of concern and potential risk - too much credit issued and debt owed by households and corporates in the world. WINZ has already mentioned the credit bubble - this is what he is referring to.

In case you don't know, NZ households as a group are at record high levels of indebtedness (relative to GDP) and this makes NZ households potentially much more financially vulnerable (and less financially flexible than if they were at lower levels of indebtedness) to rising interest rates (which are near historical lows), an economic slow down or a sudden financial shock. A RBNZ chart showing household debt to GDP since 1978 shows that we are currently at record high levels - it has continued to slowly grow and taken well over 40 years to reach current levels which are unlikely to be sustainable.

Some scenarios for your consideration:

1) How would a highly indebted household cope with a rise in debt service payments due to a rise in interest rates or the interest only loan converting to a P&I loan?
2) How would a highly indebted household cope with an unexpected loss in employment or reduction in income (for a wage earner due to a cut in hours worked). The savings rate in NZ is negative so many households may not have savings to draw upon in an economic downturn.
3) How would a highly indebted household cope with credit tightening by the banks in the event of a sudden financial shock? Think about how those interest only borrowers would cope if they were unable to refinance onto another interest only loan.

The final part of connecting the dots is how financially stressed households deal with the above situations ... the highly indebted households may decide to sell their property.

If many of these households face financial stress at the same time (either voluntary or bank imposed) and they choose to sell their property at the same time, this will make the property market a seller's market. (Recall in 2008 / 2009, there were up to 18,500 listings for sale in Auckland on trademe.co.nz. Whilst the average number of monthly transactions during that time were about 1,500. Compare this with a buyers market where the average monthly number of transactions was around 2,600 in Auckland, and the number of listings for sale in Auckland averaged around 6,000)

1) what happens if there are no buyers at the seller's desired price? - recall what happened in 2008/2009 GFC - https://www.propertytalk.com/forum/s...264#post431264



Imagine a dry hot forest in the height of summer in the middle of New Zealand or Australia - the conditions are ideal for a forest fire, but it may or may not happen. Why you may ask? It depends if the trigger happens (in this case such as lightening, a stray ember from a camp fire or some discarded cigarette for example). If you've ever driven through these forests, you've probably seen the fire risk warning signs alerting drivers and forest users - when conditions are ripe for a forest fire, the fire risk warning is labelled high and caution is warranted, when the conditions are not ripe for a forest fire (such as winter), then arrow indicates the fire risk is low.

Like the example above, the current market conditions in Auckland have increased the financial vulnerabilities of households and the risk and balance of probabilities that there could be a large drop in property prices. However, there needs to be an external trigger such as a sudden increase in inflation, interest rates or some unexpected financial shock to the global financial system, which may or may not happen. Sure, the status quo could continue, however the financial vulnerabilities and risk is much higher than at any time in the recent history of Auckland residential real estate prices over the past 40 years or so, and that much caution is warranted in this current environment.

Recall that the 2009 recession in NZ before the GFC was caused by higher inflation which resulted in higher interest rates which resulted in an 8% fall in property prices in Auckland - currently property prices in Auckland have already fallen 5-8% from their peak price and we are in a strong economy and nowhere near a recession - so what happens to Auckland property prices in the next recession?

Financial stability report of RBNZ for Nov 2018

https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Financial%20stability%20reports/2018/fsr-nov-2018.pdf

Key vulnerabilities

Household indebtedness remains high.

Around 60 percent of bank lending is to the household sector.

Indebtedness in the household sector is high relative to historical and international norms, with particularly large concentrations of debt in recent entrants to the property market and property investors. These borrowers are exposed to an economic downturn that would cause household incomes to fall, as well as to sharp increases in borrowing costs. These vulnerabilities are amplified by the heightened risk of a fall in house prices. However, house price and credit growth have both eased over the past 12 months, and lending standards have improved, helping to reduce housing lending risk (figure 1.1).

Dairy farm balance sheets remain stretched.
Indebtedness remains high in the agriculture sector, particularly for dairy farms (figure 1.2). While the sector is currently profitable, commodity prices are volatile and the sector remains vulnerable to another downturn. In addition, there are a number of longer-term challenges facing the sector, including managing the risks of climate change. It
remains important for the sector as a whole to continue to repair its balance sheets, to restore resilience to a future downturn and to allow farms to invest to adapt to medium-term challenges


Global risks to stability have increased.
As a small open economy reliant on foreign funding, New Zealand’s economy is exposed to global risks. Following a decade of low interest rates, global debt levels have built up significantly (figure 1.3), asset values have become elevated and pricing for risk is low. This leaves markets vulnerable to sudden shifts, for example if interest rates rise suddenly in advanced economies, or if there is a sharp fall in global economic growth due to an escalation in protectionist trade policies. This vulnerability is highlighted by the current elevated price volatility in equity and debt markets.

New Zealand’s vulnerability to international shocks has improved in recent years, as banks have reduced their reliance on foreign funding, but global risks have increased.

The Reserve Bank also operates macro-prudential policy to manage higher-than-normal risks arising from asset and credit cycles. The Reserve Bank introduced LVR restrictions in 2013 to address rising housing lending risk. Easy lending standards were amplifying debt and house price imbalances, and ultimately increasing the risk of a
subsequent sharp housing market correction. The LVR restrictions have helped to lean against these risks by improving the quality of bank mortgage lending portfolios and reducing the number of households that are financially vulnerable. This reduces the risk that large numbers of households are forced to sell their houses or significantly reduce spending in a downturn.

House prices remain high relative to incomes and rents, and are therefore susceptible to a correction. However, momentum has waned in the housing market since early 2017 and credit growth to households has returned to more sustainable levels. Banks are also more rigorously assessing the ability of customers to service their loans. This has seen a gradual reduction in the risks that the LVR restrictions were designed to mitigate. And housing market pressures are expected to remain subdued, which will further reduce risks over time.

[Chris W]

Deposit run on Italian banks could lead to liquidity pressures on Italian banks.
Liquidity pressures on Italian banks could lead to credit tightening in Italy.

Also note that:
1) Italian sovereign debt was downgraded by Moody's to the lowest investment grade rating. 25% of this debt is held by non Italians (most likely other European banks, bond funds, money market funds). If this is downgraded to non investment grade (i.e junk), there are likely to be some market price adjustments and the impact of mark to market accounting on the banks. Could affect other money markets in Italy - commercial paper financing availability and funding costs, bank funding availability and funding costs etc
2) ECB will stop buying Italian sovereign debt at end of 2018, so who is going to buy and what return will they want to compensate for the investment risks? Once again, this could have an impact on the mark to market accounting on the banks ...

Potential for market disruption and possible impact on global liquidity (and the possible flow on effects on bank funding in Australia and New Zealand, and the possible flow on effects of banks willingness and ability to continue to extend credit in their respective economies) ...

How developments globally can impact the economy and financial system in New Zealand. More importantly, this potentially impacts the bank lending environment and your ability to finance your property projects.

From the RBNZ Nov 2018 Financial Stability Report


The New Zealand financial system’s international vulnerabilities

As a small open economy that borrows from abroad, New Zealand is reliant on the willingness of foreigners to lend to domestic residents and purchase New Zealand goods, services and assets. New Zealand is therefore exposed to risks that could disrupt international funding markets or harm the global economy. New Zealand’s vulnerability to
international shocks has improved in recent years, but global risks have increased.

New Zealand is reliant on funding from abroad...

New Zealand’s current account has been in deficit for the past 40 years, reflecting that residents have persistently spent more than they have earned. The difference has been made up by borrowing from abroad. This borrowing is reflected in New Zealand’s net external liabilities, which currently stand at 55 percent of GDP. Three-quarters of this net balance is intermediated by New Zealand’s banks.

Reliance on offshore funding leaves the financial system vulnerable to episodes of heightened uncertainty in global financial markets, which can impact the availability or the cost of that funding. This vulnerability was exposed during the height of the GFC when New Zealand banks were effectively shut out of offshore funding markets (figure 3.1). Market uncertainty and the cost of offshore funding have remained relatively low in recent times. However, global developments could cause a sharp repricing of risk in global financial markets, increasing the cost of offshore funding. Higher funding costs would be passed on to households and businesses through higher interest rates

While New Zealand’s offshore borrowing is high by international standards, around 90 percent of it is hedged against exchange rate movements. These hedging arrangements do not eliminate all currency risk.1
However, they allow a depreciating New Zealand dollar to act as a buffer to the real economy, in part by avoiding the sharp increase in New Zealand’s debt servicing burden that would otherwise occur. Banks’ reliance on offshore funding has decreased since the GFC. New Zealand banks currently source 22 percent of their funding from abroad,
down from 31 percent in 2009 (figure 3.2). In addition, the average maturity of banks’ market funding has increased, reducing the proportion that would need to be replaced during a market disruption (see chapter 4)

...and is exposed to macroeconomic developments in other countries.
New Zealand is exposed to the global economy. Just over a quarter of New Zealand’s production is exported, with exports to emerging market economies (EMEs) accounting for a significant share (figure 3.3). As a result, developments in overseas economies can reduce demand for or increase the supply of the products New Zealand exports, lowering export prices and reducing the incomes of exporting firms. New Zealand’s links with the rest of the world also mean that New Zealand’s long-term interest rates move with those of other countries, meaning that macroeconomic conditions overseas can affect longer-term borrowing rates and asset prices in New Zealand.

The global economy is vulnerable to a negative shock.
Risk-free interest rates have been low in many countries for the past decade. Prices for a broad range of assets are now elevated, because interest rates are central to their valuations. Compensation for risk is low, as investors have become more willing to hold riskier assets in a search for higher returns. This is evident in the low levels of corporate bond spreads (figure 3.4). Low interest rates have also contributed to global indebtedness. Global non-financial sector debt as a percentage of GDP has risen from 179 percent to 219 percent over the past decade, with rising corporate debt in EMEs contributing significantly to this increase (figure 1.3). Debt has also increased in some advanced economies, and borrowing by highly-leveraged corporates has been growing.
High indebtedness and asset prices leave the global financial system vulnerable to unexpected negative developments. There is a range of possible shocks that could lead to a repricing of risk in global financial markets, causing asset prices to fall and debt servicing costs to rise. Such global disturbances can transmit to New Zealand through higher funding costs for New Zealand banks, higher risk premiums on risky assets and reduced trade.
Volatility in financial markets has picked up since the start of the year, with global equity markets falling significantly in February and October. While this has only been reflected in a modest increase in banks’ offshore funding costs, these events demonstrate the global financial system’s vulnerability to shocks, and an accompanying repricing of risk.

Some central banks are continuing to tighten monetary policy...
Global growth is expected to remain strong and inflation pressures have been rising in some advanced economies. In response, some major central banks have raised policy rates in recent months (figure 3.5). The US Federal Reserve is expected to further increase interest rates in the coming year. Central banks are likely to signal clearly the timing and pace of future policy rate increases. But given that the level of stimulus being removed is unprecedented, there remains a risk of a disorderly reaction in global asset markets. Investors adjusting their expectations for monetary policy is likely to have been one factor behind the higher volatility in equity and bond markets since the beginning of 2018.

In New Zealand, monetary policy is not expected to tighten for some time, which has been reflected in the stability of our long-term interest rates. However, global inflation could be higher than expected, causing monetary policy overseas to be tightened more quickly. The anticipated impact of this on New Zealand’s economy could put upward pressure on domestic long-term interest rates and borrowing costs.

...which could trigger weakness in some emerging markets.
Some EMEs borrow heavily in foreign currencies, primarily the US dollar (figure 3.6). Rising US interest rates and appreciation of the US dollar have contributed to weakness in some of these economies. Investors have withdrawn capital from some EMEs in recent months due to concerns around rising debt-servicing costs for unhedged foreign currency borrowing, as well as a range of country-specific factors.

This has resulted in tighter financial conditions in some EMEs, partly because central banks have raised interest rates to reduce inflationary pressures and capital outflows. Turkey and Argentina have experienced particularly strong pressures, leading those countries’ central banks to increase their policy rates by 16 and 40 percentage points respectively since the beginning of 2018.

New Zealand is exposed to emerging market weakness through our trade linkages with Asian EMEs and through developments that disrupt global financial markets. To date, Asian EMEs have faced less pressure than other EMEs. This is reflected in sovereign credit default swap (CDS) spreads, which have increased less for Asian EMEs (figure 3.7). CDS spreads reflect the price investors pay to insure against losses on government debt. The resilience of Asian EMEs reflects that their external imbalances have improved over the past two decades. This has helped to lessen the impact of EME pressures on New Zealand so far, but New Zealand could still be exposed if pressures on EMEs intensify.

Protectionist trade policies could harm global growth...
Heightened global trade tensions could see some countries adopt more protectionist trade policies, which could reduce global growth. Tensions have eased in North America, following the signing of a trade deal between Mexico, Canada and the US, but the trade conflict between the US and China has intensified. In September, the US imposed tariffs on USD 200 billion of imports from China, prompting an in-kind response from China. The direct impact on global growth of tariff measures implemented to date is likely to be small (figure 3.. However, if global trade tensions were to escalate, the IMF estimates that long-term global GDP would be around 0.4 percent lower than a baseline without increased tariffs.

Separately, negotiations on the exit of the UK from the rest of the EU are ongoing and the outcome may have a material bearing on growth in the region, in part by reducing trade. With London being a key financial centre, a disorderly exit from the EU could also disrupt the provision of certain financial services, such as derivatives and insurance contracts

...and may contribute to a slowdown in China’s economy.
Reduced trade between the US and China could cause a material slowdown in China’s economy. China has contributed significantly to global growth over the past decade, and is New Zealand’s largest trading partner. China’s economic growth has slowed slightly over 2018 to 6.5 percent per annum and Chinese equity prices have fallen by over 20 percent since January.

Regardless of its cause, a significant economic slowdown could act as a trigger of financial risks that have built up in China over the past decade. China’s corporate sector is highly indebted relative to other countries with similar income levels (figure 3.9), and local governments have borrowed heavily over the past decade. These risks are further magnified by complex and opaque arrangements in China’s financial system. Authorities have taken measures to address these risks, including by reducing ‘channel lending’, whereby banks channel funds from depositors to borrowers through non-bank financial institutions.

However, to minimise disruption to the financial system and to avoid further slowing economic growth, authorities have recently slowed implementation of these reforms. For example, transitional arrangements around new rules for asset management products, which facilitate channel lending, have been relaxed. Authorities have also encouraged banks to lend to private firms, and have reduced banks’ reserve requirements four times since the beginning of 2018. These responses, which give banks greater scope to expand lending, may reduce the chance of risks crystallising in the near term, but could exacerbate underlying vulnerabilities.

Household sector risks in Australia remain high.
Global shocks can also impact New Zealand through Australia. Australia is the second-largest destination for New Zealand exports, and New Zealand’s four largest banks and several large insurers are Australian owned.

Australia has also experienced rapid growth in debt and asset prices. In particular, household indebtedness is high by international standards, having risen considerably over the past 30 years (figure 3.10). This exposes the Australian financial system to a decline in the credit quality of outstanding mortgages. Households are particularly exposed to shocks to income, an increase in interest rates or a housing market downturn. House prices have fallen in some key Australian housing markets over the past year, by 7 percent in Sydney and 5 percent in Melbourne. If house prices fall further this could put pressure on some households. Actions taken by Australian regulators in recent years may gradually improve the resilience of the household sector. The Australian Prudential Regulation Authority has required banks to strengthen how they assess whether borrowers are able to service their loans under a range of economic conditions and has encouraged banks to limit the amount of higher-risk mortgage lending.

[Nick G]

What's your point with all this Chris?

[eri]

thanks Chris

to summarize

the economy is zipping along pretty quickly over new territory

the steering isn't very precise

there are bumps ahead

all efforts will be made to get AROUND them

but it'd be best to be strapped in

and paying attention

[Perry]

14 Jan 2016

Where will people put money with shares about to crash, where will people go with economies cracking, and political issues snowballing . . . Great time to be in Auckland property isn't it. Even have lowest interest rates for decades and a lull in the market right about now.

I don't pay any attention to the share market, so how's the 'about to crash' prediction look, to those who are 'in' shares?

[Sportsvee]

I don't pay any attention to the share market, so how's the 'about to crash' prediction look, to those who are 'in' shares?

Looks like a great buying opportunity coming (if/when it happens). Long term game.

Sell when others are greedy, buy when others are fearful.

[Perry]

So the Jan 2016 prediction, "about to crash" is just BS?!

[Sportsvee]

So the Jan 2016 prediction, "about to crash" is just BS?!

In fairness, they did say "about to crash". So that could be within 3 months, 6 months, 1 year, 2 years, 5 years, 10 years, this lifetime.

One day someone will be right 😉

[Don't believe the Hype]

So if I say I’m ‘about to have a heart attack’ when would you call the ambulance?

I’d hope you wouldn’t consider waiting 5 or 10 years

[eri]

tricky across the ditch

Sydney and Melbourne were down 1.3 per cent and 1.6 per cent respectively over the month,

bringing their rolling quarterly falls to 4.5 per cent and 4 per cent

and annual falls to 9.7 per cent and 8.3 per cent.

The NSW and Victorian capitals are now 12.3 per cent and 8.7 per cent down from their respective peaks in July and November 2017

https://www.nzherald.co.nz/business/...ectid=12200033

[Sportsvee]

So if I say I’m ‘about to have a heart attack’ when would you call the ambulance?

I’d hope you wouldn’t consider waiting 5 or 10 years

Depends if I like ya or not 😉
Different situation though, your "signs" would probably be more on point for a heart attack than what the predictors use.

Nothing wrong with being prepared. In your example, cell phone charged and at the ready 👍