On the surface there appears to be a lot in common with the Irish, Greek, and NZ economies. All three have high net foreign liability positions, liabilities are highly concentrated through banks who are borrowing overseas, all three have experienced some form of housing boom and lift in consumption, and finally all three appeared to have a relatively strong fiscal position before the GFC before moving into fiscal deficits after the shock. And yet (so far) while the Irish and Greek economies and banking systems have collapsed, New Zealand’s has been fine.
There are two major differences that have helped reduce the implied risk on our debt, making New Zealand much less likely to experience a bank run:
- Our banking system is primarily foreign owned (Eric Crampton expands on why this is a good thing),
- We have a freely floating exchange rate – combined with having much of our debt denominated in NZ$ this is useful.
Addendum: Matt Yglesias offers relevant comment.