30 Sep 2008

Key confident NZ can weather financial storm

10:27 pm on 30 September 2008

National Party leader John Key says tough times are ahead, but New Zealand is in a good position to weather the global credit crunch.

The New Zealand dollar is expected to fall further and interest rates remain high after the United States House of Representatives rejected a $US700 billion bailout of America's troubled financial system on Monday.

The bailout was proposed by the Bush administration on 20 September, amid warnings that urgent action was needed to prevent an economic disaster. The package would have enabled the US Treasury to take over bad debts from ailing institutions.

The failure of the bill - after more than a week of intensive closed-door negotiation intended to hammer out a compromise plan - brought new uncertainty about the response of the US government to the worst financial crisis since the Great Depression.

Markets worldwide fell sharply at news of the bailout plan being rejected.

Mr Key says he hopes the Congress will re-visit the issue for the good of the international banking system.

He says New Zealand draws much of its capital from international markets and banks here could restrict their lending as liquidity dries up. However, he believes it is a short term problem.

Mr Key says New Zealand is in better shape than many countries because it is less exposed to the problems experienced on Wall Street.

Finance Minister Michael Cullen says he is surprised US lawmakers voted against the financial rescue package, but that does not mean lawmakers won't try again.

NZ financial systems not immune

Radio New Zealand's economics correspondent says the Reserve Bank could yet take action to insulate the banking system after a slump by the NZX 50 on Tuesday morning. The Official Cash Rate is currently 7.5%.

Until now, New Zealand's financial markets have missed the worst from the banking failures overseas.

But ANZ National Bank chief economist Cameron Bagrie expects the fallout to spread to New Zealand, with banks finding it expensive to borrow money.

The Reserve Bank says it is keeping a close eye on developments, but at this stage it has no plans to take any actions out of the ordinary to shore up the domestic financial system.

New Zealand's benchmark index fell as much as 4.6% on Tuesday, before losing 98 points, or 3.1%, to close at 3090.

The New Zealand dollar has fallen 1.5 cents against the US dollar since Monday. At 5.20pm, it was trading at US66.78c.