Since July 2007 the news headlines in the financial and business media have been dominated by the fall-out from the sub-prime mortgage fiasco in the US . Court cases and investigations by regulators are pending all over the place, but in the meantime investors, brokers and banks around the globe have been found wanting in terms of financial risk management control, as most invested in structured/leverage securities they did not fully understand or appreciate the particular risk characteristics of.

Early claims by some (including the NZ Minister of Finance) in July/August last year that the credit shock would be contained and short-lived have proven to be totally wrong. The total credit process and machinery in the US economy has broken down as banks slashed counterparty credit risk limits on each other. Massive volumes of extra liquidity have been pumped into the moneymarkets by the central banks, but dysfunctional debt markets have been slow to normalise. Credit rating agencies and mono-line credit insurers are also under enormous pressure as investors turn on some of the obvious co-culprits behind this credit market dislocation.

Market analysts are extrapolating likely default rates on the trillions of dollars of outstanding credit default swap contracts and concluding there are still billions of dollars of losses to be written-off by banks and investors yet. Through November and December, nearly all the mainstream US banks and investment banks were announcing billions of asset write-downs and concurrently re-capitalising their balance sheets with new share placements to Asian and Middle Eastern investors and sovereign wealth funds.

The credit and banking crisis, along with the plunging values of US real estate assets, is driving the US economy into a likely recession. Our view is that the authorities in New Zealand , like the RBNZ and the Minister of Finance, have arguably been far too complacent (or poorly advised) as to what all this means for our economy and markets. Credit conditions have tightened considerably in the NZ economy over the last six months. Banks are now raising lending interest rates to borrowers as their own wholesale funding credit margins increase.

The cost of capital for banks has increased substantially and banks are pulling in their horns on lending growth. It is now all about quality rather than quantity in terms of bank lending approaches. Stock exchange-listed Australian banks are seeing their share prices slammed following belated revelations that they have credit exposures to the faltering US mortgage lender, Countrywide. Debt financing of commercial property developments has hit a brick wall in NZ. Credit conditions and the price of credit have fundamentally changed in New Zealand , unfortunately many have been slow to recognise this.