Major banks will be reluctant to call in debts from struggling dairy farmers because they won't want to record the losses on their books, economist Shamubeel Eaqub says.
Lower dairy prices are putting the financial squeeze on dairy farmers, with about half of them experiencing a second successive season of operating losses.
The Reserve Bank said yesterday it was confident the banking system could cope with a severe downturn in the dairy sector after running tests to see how they would manage sustained low milk prices and sharp falls in land values.
Mr Eaqub told Morning Report farmers could take some relief in knowing that in the past banks have done everything possible to prevent farmers from defaulting on their loans.
"This happened in the last big drought when we had the recession as well in 2007- 2008 where they extended the terms and did everything possible so they wouldn't have have to write the losses on their books. So the profit motive does trump, and in this case, it's going to help the farmers in terms of not calling in the debt."
But the downturn in dairy prices this year was deeper and more sustained, he said.
"We haven't been in a situation like this where we're going to see three years of industry-wide losses against the backdrop of very high cost structures because we have gone into very capital-intensive type of farming and with lots of debt.
Of particular concern were drier areas which needed expensive irrigation such as Southland and Canterbury, he said.
He said while we were not facing a failing banking system, the drop in milk prices was "severe", Mr Eaqub said.
http://www.radionz.co.nz/national/programmes/morningreport/audio/201793557/regions-vulnerable-in-dairy-downturn Listen to economist Shamubeel Eaqub on Morning Report