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NZ in right position to cope with US downgrade: Key


Monday 8th August 2011

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Prime Minister John Key believes the Government has put the country in the right position to be able to cope with Standard & Poor's downgrade of United States government debt.

The credit rating agency lowered US rating from AAA to AA+ for the first time since granting it in 1917.

The move came less than a week after a gridlocked Congress finally agreed to spending cuts that would reduce the debt by more than US$2 trillion ($NZ2.37t) -- a tumultuous process that contributed to convulsions in financial markets. The promised cuts were not enough to satisfy S&P.

The drop in the rating by one notch to AA-plus was telegraphed as a possibility back in April. The three main credit agencies, which also include Moody's Investor Service and Fitch, had warned during the budget fight that if Congress did not cut spending far enough, the country faced a downgrade. Moody's said it was keeping its AAA rating on the nation's debt, but that it might still lower it.

Key said New Zealand was not immune from any global slowdown that might result from the reverberations of the US downgrade and continuing volatility in Europe, but the Government had done all the right things.

"The Minister of Finance and Treasury have been very conservative in the last few years, in fact we've borrowed a lot more than we've needed at good low rates, so actually we're well positioned there," Key told TVNZ's Breakfast.

"The worst scenario for us is if the US goes back into some sort of recession ... I don't think it's clear what happens to New Zealand from that perspective.

"What is good is Australia is our biggest market, China is number two, so we have other markets than just the US, and, as I say, structurally we're in much better shape and we have some domestic events that will help."

Key told Radio NZ the downgrade indicated the US was no longer as sound an investment as it had been. It sent a clear message the US needed to get its books in order.

When the New Zealand sharemarket opens at 10am today it will be one of the first to open following the US downgrade.

It is thought any major movement on the NZX would be unlikely until bigger markets open.

In normal times, in another country, a downgrade in a country's sovereign debt rating probably would force its government to pay higher interest rates to convince investors to keep buying its debt.

If that happened, it would drive up the rates that consumers pay on mortgages and auto loans, which are often tied to the government's interest rate.

But the US is a special case. Treasury debt is considered the safest investment in the world -- even after the downgrade. Investors don't doubt the US government's ability to repay the $US9.8 trillion it owes.

Some economists are worried the downgrade could trigger another financial crisis that sends Western economies back into a recession.

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