By Tony Field
The New Zealand dollar went up two cents against the US dollar and world markets soared after six of the world's biggest central banks announced they had done a deal to make it cheaper for Europe's banks to borrow American dollars.
The banks signed the deal amidst fears Europe's commercial banks would undergo a fate similar to that which saw Lehman Brothers collapse in the US three years ago.
According to economist David Lutz the move has so far been successful.
“It solved the immediate problem; the immediate problem was making sure that we didn’t have the failure of a major financial institution,” says Mr Lutz.
But Auckland fund manager Mike Taylor says it doesn't solve the bigger problem of how countries like Italy deal with their massive debt problems.
“I don’t think that is going to stop a recession, I think Europe is already in recession so there is nothing they can really do to stop that – but they can do everything they can to avoid Armageddon,” says Mr Taylor.
The intervention came as the New Zealand Institute of Economic Research warned our economy will grow by just one and a half percent next year.
“Over the next 12 months it’s going to be a case of few new jobs, wage growth will be subdued, and we will have to batten down the hatches. Unfortunately we will see no relief until 2013 or 2014,” says NZIER Chief Economist Shamubeel Eaqub.
The Institute estimates there is a 25 percent chance the European Monetary Union could fall apart and it says that would likely see the world's financial markets seize up and lead to a global recession.
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