Financial problems in the US have been going from bad to worse. Last week the US Government took over the mortgage investment companies, Fannie Mae and Freddie Mac. On Monday this week, Lehman Brothers, the 4th biggest investment bank, went bankrupt. It has been in business for 158 years. Merrill Lynch, another big investment company, was bought by the Bank of America for $50 billion. Then the next day, the US Federal Reserve decided to help the global insurance company, AIG, by buying an 80% share in the company for $85 billion. If AIG went bankrupt, it could affect financial markets around the world.
New Zealand, like other countries, is worried about how the US financial problems could affect our markets. At first, our share market dropped along with other major world markets, but after the announcement about AIG, it rose again. New Zealand has a branch of AIG with about 200 staff; however, AIG has only 7% of New Zealand’s insurance business.
One good piece of news is that oil prices are down. The slowdown in the US economy has meant less demand for oil. In New Zealand, petrol is the lowest it has been for 17 weeks.
At the moment, it seems New Zealand is fairly safe from the financial problems that have hit the US. Our banks will probably not be affected but they are nearly all Australian owned. Australian banks borrow from overseas and may have to pay higher interest rates. While the US dollar has dropped against the New Zealand dollar, this can soon change. If more American companies go bankrupt, there could be flow-on effects around the world. Money markets in New Zealand are nervous. Anything can happen.
Dr Cullen, Minister of Finance, felt confident about New Zealand’s economic position. He thought that the economy would improve towards the end of the year. Bill English, the finance spokesperson for the National Party, said that people would have to wait and see about the promised tax cuts. It was too early to know what will happen with world financial markets. |