Like its OECD counterparts, New Zealand’s economy has been badly affected by the international economic crisis, but it also suffers from long standing domestic imbalances that were accentuated by the earlier period of excessive global liquidity and low risk aversion. In the early stages of the crisis, New Zealand seemed well positioned to escape its worst effects. Its banks had almost no exposure to sub-prime mortgages or other “toxic assets”. When the recession began in early 2008 it could be attributed to domestic monetary tightening, the early stages of an overdue housing market correction and temporary drought conditions. As international turmoil intensified, however, it became clear that New Zealand would not escape a deeper recession, and in early 2009 macroeconomic indicators deteriorated significantly. New Zealanders had in fact been caught in much the same spiral of global excess liquidity, surging leverage, soaring asset prices and under-valuation of risks by lenders and borrowers that had taken hold globally. Households’ indebtedness reached 160% of disposable income – and, in aggregate they cut their saving, possibly in the mistaken expectation that ever appreciating house prices would fulfil their future savings needs, notably for retirement. As already meagre personal saving fell further, and business borrowing increased strongly, even healthy corporate profits and steady government surpluses were insufficient to finance booming private consumption and housing investment. Hence, much of the financing came from abroad. The results were excess demand pressures, a widening in already unsustainable current account deficits and rising net foreign indebtedness (93% of GDP at end-2008).