New Zealand cannot take too much comfort from having emerged from the global financial crisis with less damage than some other small and heavily indebted countries.
That was the implicit warning from Irish economist Philip Lane, a professor at Trinity College Dublin, to a macro-economic conference in Wellington yesterday.
Theshock absorbers - monetary policy, fiscal policy and the exchange rate - had worked well, Lane said.
But the country's high level of foreign debt presents both a chronic and potentially an acute problem.
It is a drag on growth, because it is in various ways hard on the export sector, where productivity tends to be higher and where lost capacity can be difficult to reverse. And it leaves the country exposed to the risk of a "sudden stop" when foreign lenders turn off the tap.
"It's not a case that New Zealand is outrageously risky," Lane said, "but the next crisis will be different and won't necessarily play out the same way."
He dismisses the argument that because the debt has largely been run up by the private sector it is less problematic than if it had been incurred by the Government.
Private sector liabilities can become public ones really quickly, as Ireland learned to its cost. Before the crisis its net public debt was only 11 per cent of GDP. Now it is massive, swollen by having to bail out banks that were too big to fail.
Almost all of New Zealand's external debt is either denominated in New Zealand dollars or hedged, largely removing the risk that the debt would balloon if the exchange rate fell.
We can't assume counterparties to that hedging will always be there, Lane said.
Another factor sometimes cited as a reason New Zealand's external liabilities are less problematic is that a substantial minority of the banks' foreign debt is to their Australian parents, and that gives it more of the characteristics of equity.
But it also means New Zealand is exposed if the parent banks get into trouble, as well as to local risks like a reversal in house or farm prices.
As for how these risks might be mitigated, fiscal restraint during the boom years would help, but it depend on persuading voters to go along.
Macro-prudential regulation of the banks could help too.
