Double credit downgrade a double blow for NZ economy

  • Breaking
  • 30/09/2011

By Patrick Gower

New Zealand was forced to swallow a double downgrade today.

Credit rating agency Fitch dropped its rating for New Zealand from AA+ to AA. Then, a few hours alter, Standard and Poors did the same.

It has left the Government with an unpleasant taste, saying it has done all it can to help the economy and it is now up to New Zealanders to save more.

“It’s a downgrade and we’d be better off without it,” Finance Minister Bill English said.

The double downgrade means damage control; it’s the global economy, not the Government.

“Obviously a stronger credit rating is better than a weaker one,” Prime Minister John Key said.

Today, the credit agencies’ concerns were all about debt.

The Government and Private Sector’s combined debt is $140.2 billion. That makes up 70 percent of GDP – everything the country earns.

The agencies say that makes us an “outlier among peers”, is a “key vulnerability” and “will deteriorate further”.

But the big concern is the global volatility. The latest move today saw Germany step in to help expand a Eurozone bailout.

Mr English says right now, the credit agencies just don’t like debt and while he thinks the Government is doing okay, New Zealanders can do more at home.

“We’re asking households to do a couple of things at once; pay off their debt and increase their savings.”

The downgrade means our economy is viewed as more of a risk. Our banks will have to pay more when they borrow from offshore.

The cost will of course be passed on to New Zealanders, in the form of higher mortgage rates.

“Eventually it could push up the cost of bank funding. Which could mean higher interest rates, independent of the Reserve Bank,” says Westpac Economist Dominick Stephens.

The market reaction to the downgrade was immediate; the dollar sank to a six-month low of 76.46 cents.

If it stays that way, it means more expensive imports – notably petrol.

“The ratings agencies aren’t standing for the election this year so they’re telling it as it is. Mr Key and Mr English are playing it down because they face an election in 10 weeks time,” says Labour leader Phil Goff.

This is what you call “external assessment” and a downgrade is a downgrade. The verdict is New Zealand has too much debt.

The big question is, what will the Government do about it?

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source: newshub archive