Dollars & Sense: When Greece is the word, what do you do?

I am on an Air Pacific flight to Fiji to give a talk at a large conference. The airplane cabin is a tad cold, the food fairly basic (always board an airplane with your own lollies and bottle of coke). But apart from that, things seem fine.

The theme which I have been asked to speak on is business resilience. It’s not about how to profit from forecast accelerating growth, or how to weather temporarily tough times. It’s about arranging business affairs in order to handle what is likely to be a volatile business climate over the next few years.

• Listen to Tony Alexander explain whether fixed or floating interest rates are the best option for farmers right now

We are now almost four years down the track from the collapse of the Lehman Brothers in late 2008. And still, the world is looking like a very bad place. Worries about private sector debt have shifted, to some extent, to government sector debt.

Concerns about the indebtedness of banks in the United States has eased off substantially, even though house prices are still going down and now sit 35 per cent below their peaks. They are, in fact, back to where they were in 2002, and a whole generation of home buyers have had their entire equity wiped out.

That also means a new generation of young buyers is being presented with the best buying conditions for a long time, with the US 30 year mortgage rate also falling to 3.78 per cent, which is its lowest level since records began in the 1950’s.

But just as US bank worries almost disappear, worries about European banks are soaring. This is most notably the case in Greece, where banks so far have lost one-third of their deposits, as people shift their money into Euros in other countries.

There’s a high risk Greece will leave the Eurozone due to their inability to meet the conditions they earlier signed up to in order to receive bailout money.

In Spain, banks are also worried about losing much of their €1 trillion in deposits, as bad debts skyrocket due to hefty exposure to house prices. These have fallen 25 per cent from their peaks and look like falling a lot further.

The potential collapse of these banks, or the finances of governments forced to recapitalise them, means investors are deserting Europe in droves and that is causing bank funding and normal capital market operations to become fractured once again.

The result is a rapidly worsening outlook for global economic activity, with severe downside risks facing growth in Europe and building downward pressure on growth throughout Asia, and to a lesser extent the United States.

For New Zealand, this weakness will be visible in commodity price falls, the weakening of the NZ dollar, low interest rates, falling business and consumer confidence, pullbacks in business hiring and investment.

As this latest shock winds its way through our economy, the question is simple: what can businesses do about it? The answer is more of what they have already done over the past four years.

It seems obvious, if not glib. The chances are that if you are in business now you must have developed mechanisms for coping with a volatile and often weak operating environment.

Having said that, maybe next week or the one after, I will discuss some ways you can improve your resilience to economic weakness. 

Tony Alexander is the chief economist for the Bank of New Zealand.