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Q+A: Bill English

Greek Crisis: It’s not like this is a shock Bill English says

New Zealand's Finance Minister is "not particularly concerned" about whether Greece's financial crisis will roll on to New Zealand.
Greeks will vote in a referendum tonight on whether to accept a new austerity plan and Bill English says from NZ's point of view the economic risk would be "contagion where financial markets get really worried about a Greek exit".
That would affect the markets in which we are borrowing, Mr English told Q A this morning.
The Finance Minister said the bigger implications are the political challenges for Europe where they will be having "intensive discussions" about what it could mean for one set of fiscal policies right across Europe.
"I don't think anyone ever really imagined a country would actually exit Europe."
Mr English told Q+A presenter Simon Dallow that the effects on financial markets could be potentially a bit disruptive but "it's not like this is a shock".

END

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Q + A
Episode 19
BILL ENGLISH
Interviewed by SIMON DALLOW

SIMON All eyes will be on Greece later today as its citizens vote in a referendum over whether the country should accept another austerity plan from the IMF and the EU. The European Union’s warned that a “no” vote may see Greece leave the EU, although Athens has said it wants to stay in the union. So what does all this mean for our economy? Finance Minister Bill English has just returned from a trip to China and Australia. He joins me now from Wellington. Good morning, Minister.

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BILL Good morning.

SIMON A “yes” vote means more austerity for Greece. A “no” vote, though, as uncharted territory. Where do you see this heading?

BILL Well, look, it’s hard to know. I don’t know if anyone really understands where it’s heading, but I think, from New Zealand’s point of view, the one economic risk would be contagion – that is where financial markets get really worried about a Greek exit, and that affects the markets in which we’re borrowing. But otherwise, I think the bigger implications of it are the political challenges for Europe, where I don’t think anyone ever imagined a country would actually exit Europe, and they’ll be having intensive discussions about what it means if this happens for the political project of one set of fiscal policies right across Europe, for instance.

SIMON You mentioned contagion. The ANZ’s Cameron Bagrie talked about the snowball effect. What exactly did he mean? What could happen?

BILL Well, look, I think we’d be speculating a bit. You’ve got to keep in mind here that Greece is a small economy, really quite small in Europe. Europe’s big enough to be able to pay for Greece forever if it really decided it wanted to; it’s just decided it wants Greece to sort out their economy. So the financial effects, the effects on financial markets potentially could be a bit disruptive, but, look, it’s not like this is a shock. I think financial markets have got used to the idea something quite significant could happen in Greece. It is relatively small, so I have to say I’m not particularly concerned about whether it will roll on to us. It will be fascinating to see how Europe handles an exit.

SIMON What sort of effects could roll on to us?

BILL Well, where we connect up is borrowing in the financial markets that are also keeping a very close eye on Greece because they’re involved with-- German banks, for instance, which have a big exposure to Greece. Now, if those markets get really concerned about it, then that might affect our ability to borrow. But it’s hard to imagine it being really significant.

SIMON We have enormous private debt in the form of mortgages. That is easy, and that is international credit. How prepared are we if there is another credit crunch – something flows on from Greece?

BILL Oh, well, very prepared. The last time round, we weren’t. Like most developed countries, we weren’t really ready, but we still got through it okay. This time round, if anything happened this time round, we’re in pretty good shape.

SIMON You’ve just come back from China. With growth declining, the share market there fell 20% over the course of a week, how worried are you about China, given its prominence as one of our trading partners – the second-biggest?

BILL Well, how they do certainly matters to New Zealand. Bear in mind, whatever challenges in China, the US economy, which is the world’s largest economy, is picking up pretty well. So you’ve got a picture where the largest economy is going pretty well, and the second-largest has certainly got some challenges. Now, I think in China, we’re relying on the track record of the administration there in being able to manage the growth pains that China has and still maintain pretty strong growth. So they’ve got some real financial challenges – large amounts of local government debt, for instance, backed by assets whose value’s probably going down. But they have shown an ability to manage quite tricky economic trade-offs, and the indications when I was there was that they fully understand the issues; they’re quite open about them; and they’ve got the ability to maintain Chinese growth at reasonable levels – maybe not as high as they officially would like, but at reasonable levels – while they deal with their financial market issues.

SIMON That growth is declining, though, and that of course means weakening demand for us. Are you concerned with the effects of that?

BILL Well, let’s see how it affects the actual products. I mean, dairy prices are low in China, and it’s not so much because China’s slowed down; it’s because of the sort of perfect storm of excess supply around the world. So New Zealand – we would keep an eye on the product-specific effects. The fact that China slows down a bit doesn’t necessarily have an impact, for instance, on a range of our export industries that are going pretty well.

SIMON You mentioned dairy. Of course there are still tariffs in our current free trade agreement with China. What did your Chinese counterpart tell you about the potential removal of those?

BILL Well, it’s subject to negotiation, and it’s actually a sign of success. When the levels were set for how much tariff-free dairy product went into China, no one imagined we’d be selling as much there as we currently are. So that’s something about— The Chinese government is committed to a review – pretty constructive – and we’ll just work through that process with them. But it’s extra gains there, particularly for the dairy industry.

SIMON Australia’s got a new FTA, with better terms than ours. Are we going to at least match those?

BILL Well, that’ll certainly be part of the discussion.

SIMON What were the indications?

BILL Oh, that they understand a need for a connection between the two agreements. The main reason Australia has the terms it has is just that it’s been done much more recently. Ours is now seven or eight years old.

SIMON Do you think we still have favourable conditions, given that we were the first to sign a free trade-agreement with China – at the present value?

BILL Well, that’s why this review’s built in to make sure we update it, because in the long run, the outlook for growth in the Chinese market, but also across South East Asia is very strong. There’s still a lot of people there who will become middle class consumers. And as their incomes rise, they’ll want more protein. Whatever the short-term fluctuations in prices, the long-term outlook’s good.

SIMON Are we become too reliant on China as a dairy trading partner, though? Those other markets you mentioned, of course, are all speculative at the moment, aren’t they?

BILL Well, you would of course sell to a market where prices are really good. And the drop in prices is actually worldwide. I think we’ve got to keep the dairy industry in perspective. It’s about 5% to 6% of the whole economy. It’s only 20% of our exports. The other 80% will be starting to enjoy the benefits of the lower exchange rate, and the lower exchange rate will help cushion the impact on dairy of their lower prices.

SIMON Economists, though, are saying the dairy price slump is worse than expected and we can expect more of the same. It’s already below a cost-benefit basis for farmers. The estimates are it could knock GDP growth by up to 1% in the back half of this year. How is this going to affect growth overall?

BILL Well, we are yet to see. How much it affects growth will depend on the growth in the other 80% of our exports and also in the domestic economy. For instance, we’ve got higher migration for longer, and that will tend to offset some of the impacts of dairy. I think the point here is not so much that we can guess all those impacts, but we’ve got an economy that has demonstrated over the last six or seven years that it is pretty resilient. You know, as a small, open economy, there is always something going wrong around the world that is going to affect us, but New Zealand businesses and households have shown they can adapt pretty quickly to those pressure.

SIMON Crown accounts are due out next week. Are you going to hit your surplus?

BILL Well, that’s… The Crown account’s up to May, and then there’s another month, June, and then the accountants do their magic adjustments at the end of the year, so, you know, we’re a wee bit more confident than we were at the Budget, but we won’t know till September, October.

SIMON Next year must be looking worse, though, this continuing dairy price slump. That’s got to be hitting you.

BILL Well, that will be—There’s a half-year update in December, when Treasury will officially revise their forecasts, so let’s see what unfolds by then. But again, we’ve got to keep this in perspective. Dairy is part of the economy. It’s probably a smaller part of it than most people think. And a lot of the rest of it is actually moving along, you know pretty good moderate growth that’s delivering pay increases to New Zealand households.

SIMON How would you describe your level of worry over the dairy situation?

BILL Oh, look, I’d say it’s concerning. People expect—We all expected the price drop to bottom out. It’s continuing to drop. That indicates it could go on a bit longer. But in the dairy sector, they’re getting on with the job of adjusting their cost structures, getting their arrangements in place with their banks. There will be some pressure, but it’s only four or five years since they went through something like this and get through it okay.

SIMON Farmers are saying it costs $5.50 a kilo, basically, to break even. Forecasts are for $4.50 a kilo. How much more pain can farmers take? What’s the government going to do about it?

BILL Well, they can take—That will depend to a large extent on their financial situations. So if they’ve already got—There’s a small minority with quite high levels of debt. They’re going to be feeling some stress. Most of them have pretty good—pretty moderate levels of debt, and they will simply have to run up an overdraft. It’s really a question of whether that’s going to go for one year or two years. It’s starting to look a bit more likely like it will get into the second year.

SIMON A dairy decline, a potential drought, a falling Christchurch house prices, which we’re already seeing; the potential drop in investment activity that follows. This is the recipe that Steven Bayliss from the BNZ says that recession is highly possible.

BILL Well, you know, he’s a good economist, but I think he’s stretching it a wee bit here. I think there’s a bit more resilience than that in the economy.

SIMON It’s a pretty precarious position, though, isn’t it? It’s pretty flimsy. The rock star has a hangover.

BILL Well, we never agreed with the ‘rock star’ label because we’re aware that there’s always risks. If you pick out all the bits that are going badly, you can paint a bad picture. Most of it’s actually going okay – migration numbers are up, households will be pleased to see interest rates dropping, our exporters are all seeing a big drop in the exchange rate. So the right kind of adjustments are happening in response to a softening in the outlook.

SIMON So the prospect of tax cuts still not a problem, then?

BILL Well, it’s still there on the horizon, and that’s why we pushed them down the road a bit, because you need to make sure you’re in the situation where you can deliver those.

SIMON At this point, would you say they’re likely or possible?

BILL Well, what’s the difference? I mean, we…

SIMON The difference is quite clear.

BILL Well, we said that we’re interested in lower taxes. We’ve made allowances to be able to execute those, so I’d say they’re likely.

SIMON A number of interest rate cuts are now being mooted and all the banks are saying we are looking at two or three cuts in the course of the rest of this year. How worried are you this is simply going to pump up the Auckland housing market?

BILL Well, it’s interesting you just referred to the Christchurch housing market. I mean, the reason that house prices there are flattening out is because we’ve got enough supply of new houses on the ground. And that’s when there was an earthquake, which causes massive immediate demand for new housing. So the system there has worked. So the flattening of house prices there is a sign of success, not a sign of recession. And that’s why we keep focusing on supply in Auckland. So, yep, lower interest rates might help—might push up demand a little bit, but there’s already very strong demand there, and playing around with interest rates won’t make that much difference. What will make a difference is getting the houses and infrastructure on the ground faster, and as we all know, that’s reasonably complex and long-term, but we’re going hard at it.

SIMON A lower price and a weaker dollar of course also means it’s more attractive to foreign investors. Any controls planned?

BILL Well, we’ve already got fairly significant controls in the Overseas Investment Act. We get regular complaints from prospective investors that the 23 tests are hard to meet and it takes a long time and it’s putting people off. So we have one of the more restrictive foreign investment regimes around the developed world, and that will stay in place.

SIMON Thank you very much for joining us this morning, Minister, and congratulations on your down south team winning at your place of work last night. You looked like a very excited Highlanders fanboy on the field, taking selfies.

BILL Well, a victory for the battlers and a leftover in the stake in 19 years, so we’ve enjoyed every minute of it.

SIMON Right. That’s Minister Bill English. Congratulations, and thank you very much for joining us this morning.

BILL Thank you.

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