18 August 2008

Fiscal Crisis

You have probably heard about the world’s financial crisis which has unveiled over the last 24 hours - but investment news can be confusing to understand at the best of times. Do you know what is going on?

The Situation

The New York Stock Market saw the worst sell-off day in years yesterday, as Lehman Brothers, the fourth largest Wall Street investment bank, went under - filing for bankruptcy. Another financial management company, Merrill Lynch, then agreed to a takeover by the Bank of America, which sparked a global sell-off the stock market.

The firms plunged because of their enormous exposure to the US subprime mortgage market. This collapse is the cause for the global credit crunch, which will have worldwide effects. Economists are predicting more firms to fall into the same situation (insurance giant AIG has just been rescued by the US Government with an $85 billion emergency loan), particularly for companies with debt linked to mortgages.

How does this affect you?

While The Reserve Bank says NZ does not have much direct exposure to Lehman Brothers, AIG has 45,000 NZ customers, including some of our biggest companies. New Zealand banks are also largely owned by Australian parents, many of whom have reported direct exposure to the affected US firms.

The impact of the world financial crisis may mean New Zealand’s expected economy recovery may slow down or even not happen at all over the next year. The fall of the US firms will flow through to NZ shares and the NZ dollar, and may have significant effects on New Zealand savings schemes such as pensions, Kiwisaver and the New Zealand Superannuation Fund. Savings rates may also plunge, and mortgage rates could stay higher for longer.

Keep up to date with the financial crisis by keeping tabs on the business news headlines on

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