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Thursday, 14 May 2009

Downgrade would hit hard

Dominion Post: A credit rating downgrade could hit New Zealand hard, adding $600 million a year to our interest bill, equal to twice

the cost of the new Wellington Hospital in Newtown, officials have warned.

In a background paper obtained by The Dominion Post, Treasury officials, using Ireland as a benchmark, draw a specific link between the country's credit rating which agencies say is threatened unless debt is brought under control and social spending.

The paper cautions that, although extra borrowing is economically attractive in the short term, the cost of continued use of debt would rise exponentially.

Ireland was the first country to offer banks a deposit guarantee similar to that provided by the New Zealand Government. It was also hit by a rapid deterioration in its fiscal outlook and it was downgraded at the end of March.

Ireland's debt now commands a premium of 150 basis points over comparable countries.

Treasury said New Zealand's sovereign debt was $36 billion last July, which cost $1.8 billion in interest costs. "If we had to pay 150 basis points [1.5 per cent] more, then the annual cost would have been around $2.4 billion.

"The $600 million difference in borrowing is approximately the same cost of building two new hospitals equivalent to the new Wellington regional hospital built in Newtown."

Debt is forecast to double over the next five years, pushing debt servicing costs even higher.

Finance Minister Bill English has flagged that debt could blow out from its current 25 per cent of gross domestic product to 70 per cent by 2023 without policy changes.

Treasury said that, as well as increasing the relative cost of borrowing, a rating downgrade would limit the number of investors who can buy our debt, lift the cost and limit the availability of credit to the private sector and increase the risk that banks would not be able to roll over funding. Even a single-notch downgrade could harm confidence.

It said countries' moves to stimulate their economies would flood global markets with debt, making it more expensive and harder to obtain. "As a small, geographically distant country in global markets where capital is increasingly mobile, New Zealand's ongoing competitiveness is reliant on the Government maintaining its strong credit rating," the paper concludes.

New Zealand was placed on negative outlook by Standard & Poor's in January as a result of the worsening fiscal and debt outlook.

Both fiscal and debt forecasts are expected to worsen in the May 28 Budget.


Rusty Kane said...

Yes I wrote a letter to the Taranaki Daily News Editor three weeks ago that was published just today 14/05/2009 saying just that..

Here is the Letter.

Debt difficulties

BECAUSE of the deepening recession foreign banks are now increasingly unwilling to roll over debt.
New Zealand and New Zealand companies dependent on raising overseas capital through debt could soon find themselves starved of foreign investment.
This reluctance for foreign banks to roll over debt could soon shrink New Zealand's money supply and cause its current economic contraction to become even worse. This will be inevitable if New Zealand loses its current Standard and Poor's AA+ rating because of the large amounts New Zealand and New Zealand companies are now borrowing to roll over debt, including Fonterra.

Its looking now more likely a downgrade is inevitable...

Steve Baron said...

National is obviously concerned about this and by all accounts their budget will be considerate of this fact. How will they react, what will they do, if there is a downgrade regardless?