Sunday 13 October, 2013

New Zealand to Feel Impact of U.S. Debt Crisis: Makhlouf

If the US government failed to pay its suppliers by October 17 – the situation threatened by the current political stoush over raising that country’s debt ceiling – the result would be very serious for all economies including New Zealand, says Gabriel Makhlouf, Secretary to the New Zealand Treasury.

Speaking to TV ONE’s Q+A this morning from Washington, where he is attending the IMF World Bank annual meeting, Mr Makhlouf said while a US Government default is unprecedented, New Zealand would not escape unscathed.

“Certainly in NZ, the Reserve Bank’s put in arrangements which I think mean that our financial system’s in pretty good shape,” he told TVNZ political editor Corin Dann. “But the world economy and the impact on the world economy would be significant…if US suppliers stopped getting paid by the US Government, it would have an impact on confidence, and it would have a big impact on markets throughout the world.”

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Q+A

CORIN DANN INTERVIEWS GABRIEL MAKHLOUF

CORIN DANN

Good morning, Mr Makhlouf. If I could start first with just perhaps getting a sense from you on your feelings on the latest there [in America] on this debt crisis. Is it actually conceivable that they might not reach a deal?

GABRIEL MAKHLOUF - Secretary to the NZ Treasury

Good morning, Corin, or good afternoon from Washington. It’s certainly possible that they won’t reach a deal, but it’s also quite possible that they will reach one. I mean, it’s probably worth just saying that this is a situation that has never happened before in US history, and it’s probably never happened before in global history that the United States would actually default. So the view here is that a deal will actually be made, but no one knows when, and no one knows how.

CORIN

Just for viewers, what sort of an impact would a failure to reach a deal mean? I mean, how serious is it, for example, for NZ?

GABRIEL

Well, it’s very serious for the whole world. The managing director of the IMF said today, Christine Lagarde, said today that it would inflict serious damage on the US economy and on the world. In practice, I think if you go back to what happened in 2008 with the GFC, there were two particular types of shock. There was a shock to the financial system, and there was a shock to the world economy. I think where we are today, certainly in NZ, is the Reserve Bank’s put in arrangements which I think mean that our financial system’s in pretty good shape. But the world economy and the impact on the world economy would be significant. Now, as I’ve said, we’ve never been in this situation. We don’t know exactly what would happen. But if US suppliers stopped getting paid by the US Government, it would have an impact on confidence, and it would have a big impact on markets throughout the world.

CORIN

So it would affect our businesses trying to trade with the world, but you’re not so worried about the credit crunch, if you like? Say mortgage rates, those longer-term fixed-rate mortgage rates which could get affected in a credit crunch. Do you think NZ’s a little bit better insulated now than it was?

GABRIEL

I do think that the lessons we learnt from the GFC and with the Reserve Bank, the arrangements the Reserve Bank’s put in place do put us in a better position to manage the so-called credit crunch. I’m more concerned about the impact on the global economy. But, as I said at the beginning, these are completely unique circumstances, so it will be very difficult for us to predict or even be able to plan in an accurate way as to what will happen. We just need to be just very aware, pay attention and be prepared.

CORIN

Just finally on this issue, how worrying is it that there seems to be a growing or a band of US politicians who are just dead-set that they’re willing to risk this, I guess, the Tea Party group? Is that a worrying trend for United States politics and the world into the future even if this is resolved?

GABRIEL

Well, I don’t want to get myself involved in discussions about US politics. What I can tell you is that I don’t think there’s anybody in the IMF meetings and World Bank meetings that I’ve been attending who are enjoying what’s happening at the moment. The uncertainty is not helping us. It’s not helping the wider world economy, so we want to see it resolved as soon as possible.

CORIN

Fair enough. I’m wondering what other issues have cropped up in your meetings. Has housing become an issue? I know NZ’s obviously got housing problems in terms of prices, but that’s not unique, is it? We are seeing some other countries with these low interest rates experience the start of housing booms. Is that a topic which has come up?

GABRIEL

No, it’s not, really. It hasn’t been a topic. Financial stability has been quite a topic. And, of course, in NZ, financial stability and house prices have been a big topic of discussion recently. But housing’s not really been a subject of discussion here in Washington.

CORIN

What are the main issues, then, that are dominating, besides the debt ceiling? Where is the thinking in terms of the world economy, assuming they can resolve that problem?

GABRIEL

Yeah, well, the discussion at the Fund, in some ways, I’ll call it subdued confidence. I mean, the Fund has shaded global growth, but it’s forecasting growth, it’s forecasting advanced economies doing slightly better, it’s forecasting emerging economies doing slightly worse, but it is forecasting growth. Actually, it is worth just saying the US economy itself, if you put aside the fiscal policy issues that they’ve got right now, is in pretty good heart. Mr Bernanke, who I met with the Minister of Finance, and with his successor-to-be, Janet Yellen, a couple of days ago, feels that the US economy’s recovery is moderate. A lot of the fundamentals are looking good, but it’s the fiscal side that needs sorting. The big topic of discussion, really, in Washington is about how the big transitions are going to take place over the next few years. How will the US or the Feds start to reduce its taper? How will China actually start to rebalance its economy? What’s the impact of the excess credit in China? How will Japan actually transition into the world it’s moving to, and how will Europe come out? It is slowly coming out of its position.

CORIN

Can you tell us how, for example, that issue about the US, I guess, withdrawing its money printing, if you like, how will that affect NZ? Because we saw with Ben Bernanke even raising the prospect of it, money, capital flying out of some developing countries, the NZ dollar falling. What will be the impact for Kiwis from that?

GABRIEL

Yeah, I mean, I think that the four things that I just mentioned - the withdrawal of the stimulus, the situation in China, in Japan, in Europe - all of those together actually mean that we’re going to be living in a world of, I think, increased volatility - certainly compared to the pre-GFC days, increased volatility for the next five to 10 years. It’s something we’ve got used to, and we’re going to have to just keep getting used to. The US removing its stimulus actually would be a good sign for NZ in the sense that the Fed has - Mr Bernanke’s made it very clear - they would start to do that when the US economy was recovering. So it will be a sign of the US economy recovering, the US dollar would likely to appreciate, that would have an impact on the NZ dollar. So, overall, it would be- actually, in itself, it would be a good thing. But how it plays out in all those various other things that are happening, I think we’re going to see markets, as we saw a few months ago, just being very uncertain and reacting in ways that could be unpredictable.

CORIN

So should then governments and also consumers continue to focus on paying down debt if you’re saying it’s going to be a rollercoaster ride over the next few years?

GABRIEL

Well, certainly government absolutely needs to keep on the fiscal policy track that it’s on, because a lot of what I’ve just described are things that we can’t control in NZ. These are events happening elsewhere. What we can control, and certainly what the government can control, is rebuilding its fiscal buffers - the buffers it had in the run-up to the GFC and which it’s now rebuilding. So it does need to continue to get on top of its spending to return us to surplus, to reduce debt in the way that it’s planning to do. Those are the things in our control, and that’s what we should be aiming for.

CORIN

Just finally, I mean, the IMF has highlighted NZ as one of the stronger-growing economies. There is going to be some good growth in NZ and presumably a bit of a boom. Can you explain to us how Kiwis are going to benefit from that if they don’t have capital, they’ve already got a job? I mean, how are they going to benefit? Are we going to see a fair distribution of that growth?

GABRIEL

I would think we should see the distribution of that growth. I wouldn’t call it a boom. We’re certainly doing very well compared to many countries in the world, and we are, as the IMF just said, one of the fastest growing economies in the developed world. People will see it firstly through the government returning its books into surplus, reducing its debt. That should give them confidence that the government’s got its books under control. People should see it in unemployment reducing. There should be more jobs. And, generally, the sorts of things that we expect to see in a recovery are what we should be seeing in NZ. I think what we want to avoid is a return to the sort of boom and unfortunate bust that’s characterised some of our experiences in the past and certainly characterised a lot of the developed countries’ economies which led us to that GFC. We don’t want to go back to a debt-fuelled consumption spree.

CORIN

Treasury Secretary Gabriel Makhlouf, thank you very much for your time. We appreciate you joining us.

GABRIEL

You’re welcome.

ENDS

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