Crisis by Alan Bollard

Author:Alan Bollard [Bollard, Alan with Gaitanos Sarah]
Language: eng
Format: epub
Tags: Business and economics, Social sciences and contemporary issues
Publisher: Auckland University Press
Published: 2011-12-31T16:00:00+00:00

In mid-March we were due for our annual visit from the IMF. They usually send a team of half a dozen staff, hold key meetings with economic decision-makers and, at the end of the week, write a report for the IMF Board. Traditionally, they have taken a healthy but tough line about the need for price stability, fiscal discipline and market efficiency. This time was different. Coming from an institution that had been shocked by the deterioration in the economic health of the world, they were warning member countries to stimulate their economies and to do it fast. We found them gloomier than us about the world, and about New Zealand. Their advice was to cut rates further and faster. Their view of the banking world was also more pessimistic than ours. They said we should think about pushing banks to raise more capital while they still could, ahead of a worsening crisis.

The IMF review teams are drawn from economists from around the world, and sometimes we privately wonder how much they actually know about New Zealand. We couldn’t doubt them this time, however, because the mission chief was not only a Kiwi but an ex-New Zealand Reserve Banker. Ray Brooks is an impressive and respected economist, and we took his advice very seriously. The team went on to warn us that the figures in the next world economic forecast from the IMF would be very bad. Reinforcing their message, the news from the other international economic agency, the Paris-based OECD, was appalling. They were forecasting a year of heavy recession: negative 4 per cent growth for the United States, United Kingdom and Europe, negative 6 per cent for Japan. The world had not seen the likes of these numbers since before World War II.

Each night brought its litany of bad news out of the States, and whenever the markets took a shock, the New Zealand dollar fell a little further. This was primarily due to a world flight to the US dollar. But we did not know where it would stop, and that was a real worry. At the beginning of March the New Zealand dollar fell below 50 US cents. But even at 49 cents there was still a well-functioning FX market. How much lower could it go before it went into a slide? And in a slide, would the Reserve Bank need to intervene to support the New Zealand dollar? We did not know.

We had started buying back New Zealand dollars to reduce our exposure to unhedged reserves, doing so covertly to avoid sparking market interest. Knowing that to support the exchange rate we might have to do this openly at some stage, we made preparations. In the meantime, there was rare pleasant news: our profits from foreign exchange trading for the 2008/09 financial year looked like they might rise significantly, a massive silver lining for the taxpayer in such a stormy year; this would help to compensate the New Zealand Government for the big falls it was seeing elsewhere, particularly from the New Zealand Superannuation Fund’s losses in equities.

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