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Prepared by Ray Brooks (Ext. 3-4454).
Based on data provided by the RBNZ for mid-2007 for banks. Figure I.3a presents debt maturity data for banks and non-banks.
Capital inflows episodes were identified on the basis of deviations from trend inflows and were typically greater than 4 percent of GDP per annum for advanced countries (see WEO October 2007, Appendix 3.1). The episodes for advanced countries include Australia (1988-90, 1995–99), Canada (1997–98), Denmark (1994, 1997, 1999), Iceland (1996–2000), Malta (1993–2000), New Zealand (1992, 1995–97, 2000), Norway (1993, 1996–97), and Sweden (1988–90, 1998–2000). In addition, four advanced countries are experiencing ongoing capital inflows: Australia (2003-), Iceland (2003-), Malta (2005-) and New Zealand (2004-).
The WEO study found that the association between higher government spending and a hard landing was statistically significant for the wider group of 50 countries. The smaller group of advanced countries does not have enough observations to test the statistical significance of this link.
Medium-term funding costs, as indicated by five-year credit default (CDS) swap spreads for the four large Australian banks, spiked in March 2008 at more than 150 basis points, before easing to about 90 basis points in early April 2008. Before the turmoil broke out in late 2007, five-year CDS spreads for the four Australian banks were less than 10 basis points.
The funding-costs-stress scenario in the FSSA assumes an increase in short-term interest rates to 18-20 percent, a depreciation of the New Zealand dollar by 40 percent, and a permanent increase in the risk-premium for New Zealand dollar denominated debt.
Gross external debt stood at 120 percent of GDP at end–2007, with debt maturing in one-year or less at 65 percent of GDP. A 100 basis point increase in the cost of the short-term debt would imply a 0.7 percent of GDP increase in income debits in the balance of payments after one year, if all the debt were rolled over at the higher funding cost.
In August 2007, the RBNZ began to accept New Zealand bank bills in its overnight reverse repurchase facility. This increased banks’ liquid assets, as a bank could agree to hold another bank’s bills in exchange for its own bills. Both banks could then use the bills to gain liquidity from the RBNZ in the reverse repurchase facility. However, banks may be unwilling to lend to each other during a disruption to capital inflows.
Looking back at the previous capital inflow episodes in New Zealand shows that in the two years following the 1995-97 episode, headline CPI inflation fell sharply, while in the two years following the 2000 episode, headline CPI inflation was unchanged.