13 Oct 2008

Think tank says global credit crisis will hit NZ hard

8:45 am on 13 October 2008

The New Zealand Institute says the global financial crisis could be the biggest economic shock to hit this country in decades.

Chief executive Dr David Skilling says this country's exposure to it will be different to overseas and will be felt through the increased price of credit and slowing growth.

He says moves in Australia to guarantee deposits in its banks to stave off the global economic turmoil should not be given too much prominence here.

Dr Skilling says New Zealand's exposure is much broader and deposit insurance is not the primary response required.

"We shouldn't think that just because we've put in place deposit insurance that somehow we've dealt with the major exposure that we face in New Zealand."

Dr Skilling says a response that aggressively tries to ensure that businesses continue to invest and employ people is a better solution.

The former Reserve Bank governor, Don Brash, says in the past major banks have been wary that guaranteed deposit schemes could encourage less creditworthy institutions. In addition, he says, policymakers have worried such schemes could tempt banks to take on greater risks.

But while he says it may eventually become necessary, he does not believe there is need for urgent action.

"There is no banking system panic in New Zealand. People recognise that our banks are in good shape and certainly in much better shape than the banks in the northern hemisphere."

The Government has said work is continuing with the Reserve Bank and the Treasury on the possible shape of a deposit insurance scheme.