Rating agencies still think we'll be spendthrifts: English

Friday 30th September 2011 2 Comments

Today’s two credit rating downgrades are a sign from the world financial markets they don’t believe New Zealand will change its borrow and spend habits, says Finance Minister Bill English.

At a hastily called press conference, English betrayed no embarrassment at both Standard & Poor’s and the Fitch credit rating agencies both downgrading New Zealand from AA+ to a AA credit rating, just days after he met them in Washington D.C. during the IMF and World Bank annual meetings.

Also reflected in the decision was the fact that rating agencies had been caught out by the collapse in financial stability in southern European economies and at the time of the global financial crisis in 2008.

While New Zealand’s external debt had fallen from over 90% as a proportion of Gross Domestic Product three years ago to around 70% today, the downgrade was “much more to do with the way the world has changed” since then, said English.

Asked whether the downgrades represented a political failure, English said: “This is more to do with the way the rest of the world has changed” in the last three years than any particular change in views about New Zealand.

However, the ratings agencies were more sceptical than the government about whether New Zealanders would reverse the recent trend for businesses and households to pay down their debts and return to borrowing to fund their activities once the economy began to recover.

“This is like the grumpy bank manager saying ‘we think you are going to go back to that”.”

“We have a more optimistic view than they do,” said English. “But events like today are a clear signal that the financial markets regard us as a bit more vulnerable than we do.”

Last week’s discussions with rating agencies had not directly covered New Zealand’s rating, said English, but rather the deterioration in growth prospects and debt levels in many developed economies.

S&P had told him that their debates on rating were “almost the most robust” when discussing New Zealand, because of its unusual mixture of sound government accounts but high private foreign debt.

While slower growth in Europe and the U.S. could affect New Zealand’s growth rates, the country’s continued exposure to faster growing parts of Asia and to Australia were an insulating factor.

The substantial recent fall in the New Zealand dollar would also help offset reduced returns to exporters from weaker global commodity and export prices. Nor was there any clear reason why a downgraded credit rating should lead to higher New Zealand interest rates.

The government was now borrowing far less than a year ago, at around $100 million a week rather than $300 million a week, and was successfully continuing to raise funds on international money markets at rates of around 4.5%, compared with around 6% 18 months ago.

English used the announcements to mount a political argument that the government’s plans for the economy and its own spending were a prudent balance between not overspending and not choking off the economy with “radical” spending cuts. “New Zealand is vulnerable,” he said.

“We have said that day after day, week after week, year after year. In some respects, people don’t take that seriously because it doesn’t have visible consequences. This is a reminder from the rest of the world that it does matter.”

However, the other major rating agency, Moody’s Investors Service, had recently reaffirmed New Zealand’s Aaa credit rating for government debt, making it the only one of 19 countries still rated Aaa with as small a gap as two notches between its Moody’s and S&P rating.

Both Fitch and S&P had already placed New Zealand on negative credit watch, with Fitch making its announcement in 2009.

BusinessDesk.co.nz

Comments from our readers

On 30 September 2011 at 4:55 pm Tribeless said:

Well of course they will think government will continue to be spendthrifts when our Revenue Minister would rather tax and spend than sign up to a Bill responsibly trying to put a cap on government spending.

On 30 September 2011 at 8:09 pm Arty said:

Is it true, governemt borrows at 4.5 to 6 % but keep the OCR at 2.5. Domectic savers are screwed - no wonder debt is preferred to saving.