KEY POINTS:
These are nervous times for banks all around the globe as they try to refinance debt they owe to banks in other countries.
The international inter-bank credit markets almost froze last week as banks stopped trusting each other.
Reserve Bank governor Alan Bollard acknowledged the disruptions on global
credit markets when he said some parts of the inter-bank markets had "jammed up," which would be a significant concern if they remained frozen for longer than a few days.
This matters for New Zealand's banks because over the past five years they have borrowed heavily in these international credit markets on our behalf and have shuffled it through to us in the form of more and bigger mortgages, boosting house prices.
About 47 per cent of all bank lending in New Zealand is funded by offshore borrowing, while about half of that offshore borrowing has to be refinanced every 90 days.
Our national accounts show $25.1 billion of our debt is "at call", which means it has to be refinanced daily by our banks. This is slightly more than double what it was five years ago before the housing boom.
There is a further $59.4b that has to be refinanced every 90 days or less, which is up about 60 per cent from five years ago.
This combined $84.5b of debt rolling over every 90 days or less is what is keeping our bankers and the Reserve Bank governor up at nights. If the inter-bank credit markets were to remain frozen for much more of that 90 days, New Zealand's banks have a significant issue to manage.
The problem isn't quite as bald or as bad as it appears. Most of that $84.5b is borrowed from parent banks in Australia or one of the other big four banks in Australia.
There is still inter-bank lending going on between these big four banks, which include Commonwealth Bank of Australia, ANZ (ANZ and National), National Australia Bank (BNZ) and Westpac, although at higher costs.
So the real issue becomes whether the foreign inter-bank lending between Australia's big banks and the rest of the world jams up too.
Most estimates put the size of this short-term foreign debt owed by Australia's banks at about A$150b ($175b).
The danger with any short-term debt is the unexpected knock on the door from the lender saying they want their money back rather than just letting it roll over.
There's no suggestion non-Australasian banks would want to take all their money back at short notice. What's much more likely is they would want some of it back and charge a lot more for the rest.
This is the result of borrowing too much on a short term from the rest of the world to invest in housing.
The Reserve Bank and others have warned that eventually New Zealand's banks and ultimately all the mortgage borrowers would be at risk if market volatility disrupted that supply of cheap short-term money.
Technically, our banks have the ability to ask for the mortgage to be repaid at any time, even if it is structured as a 20-year mortgage.
Any wholesale recall of that mortgage debt would cause chaos and destroy a bank's brand. What's more likely is a crumbling at the edges where banks stop new lending and are extremely tough with any refinancings or top-ups.
Borrowers wanting 80 per cent plus loans or low-doc loans can forget about it in the current environment. The moment of truth is upon us as credit markets seize up.
Bollard and our banks will be crossing their fingers the freeze thaws soon. If it doesn't, those who fund offshore (not Kiwibank) will raise fixed mortgage rates significantly and curb new lending drastically.
* Bernard Hickey is the managing editor of www.interest.co.nz, a website for investors and borrowers wanting free and independent news and information about interest rates, banks, finance companies and the economy.