-
Related
We've long been told it was something to be feared, something to be avoided at all costs. The 2011 Government budget was specifically geared toward avoiding a credit rating downgrade by reassuring the major agencies that we had a plan to get back to surplus. The purported threat to our economy of a downgrade was used to justify unpopular policies like trimming Kiwisaver incentives and the plan to sell part of four state owned assets.
And yet, now we have been downgraded for the first time in 13 years - by not one but two credit rating agencies - we seem to be being told it's not our fault, the goal posts shifted on us, it's not a big deal- don't worry!
Now the dust has settled, is it or isn't it something we should be worried about?
The answer depends on what you choose to focus on.
From a market perspective the answer is probably no. The dollar fell on the news, but not dramatically. Wholesale interest rates rose, but not by much and then fell again. Contrary to predictions of interest costs rising by about 1.5-percentage points, made by the Treasury back in 2009 when Fitch first put our credit rating on negative watch, the Finance Minister, economists and market watchers don't believe it will push up the cost of borrowing much.
Certainly it hasn't affected the cost of borrowing for the Government - the first bond tender to be held since the downgrade offered $200 million worth of bonds of different durations - and received bids for $700 million. They paid, on average, 0.1% more in interest than at the previous auction. It's more, but not much more.
It could of course be more of a reflection of the European debt crisis than the credit rating downgrade. The debt crisis has already made it more expensive for the banks to borrow, according to the CEO of Australia's biggest bank the Commonwealth Bank of Australia, Sir Ralph Norris. However he says we are yet to feel it because "at the moment our funding situation is strong and we don't see any need ...to increase rates over and above that of the Official Cash Rate".
We do need to worry about Europe, but here's why I believe we should also worry about our credit rating.
The politicians protested that we didn't deserve it because nothing at home has really changed - but perhaps that's the point. It takes time, a long time, to change a country's habits and convert phenomenal levels of debt built up over many years, to more substantial levels of savings. Plus making those changes has consequences. Borrowing and spending fuels faster growth in the short term, while ferreting it away will help us longer term but it hurts those who benefit from consumers consuming now.
While we have made some progress, bringing down our net external debt from 85 to 70% of the size of our economy, we've a long way to go, and many temptations to return to our old habits along the way.
The Government has made some changes to the tax advantages of property - but in my view not enough to counterbalance the attractions. We now have the official cash rate at a record low and banks are loosening the conditions they imposed on lending during the global financial crisis. And even if interest rates weren't so low the fact remains no bank would loan you 95% of the value of say a share portfolio the way they would on a house. There is every danger our love affair with housing reignites and undoes all the progress made over the past few years. It would take bold, unpopular and therefore unlikely government policy to change it.
The politico-speak has been about muddling through the fallout and I'm sure we will. But muddling through is not a strategy. Muddling will not return us to AA plus.
The Finance Minister Bill English is right - New Zealand is not run by the credit rating agencies. But while we continue to borrow so heavily from offshore, especially while debt is something of a dirty word, we will remain at their mercy. If you ask me, that is worth worrying about.
To read more opinion by Nadine Chalmers-Ross click here
Do you agree with Nadine Chalmers-Ross? Have your say on the messageboard below.
Add a Comment:
Post new commentBilly J said on 2011-10-12 @ 08:17 NZDT: Report abusive post
The issue is not the short term effects of the credit rating downgrade but what is its basis. Fitch and Standard & Poors were clearly of the view that accruing a $16 billion p. a. deficit to fund tax cuts in a time of Recession is unsustainable. In addition raising GST to 15% and increasing ACC and petrol based charges in a time of recession is considered economically unsound. The results so far have been a $253.9 billion overseas debt of which $40.8 billion is government debt .