International ratings agency, Fitch Ratings, has released a report saying New Zealand topped a list of countries most exposed to de-leveraging during the global financial crisis. However, Fitch also said that New Zealand was well placed to benefit from a global economic recovery because there was little indication that financial sector distress would intensify. New Zealand's place at the top of the de-leveraging exposure list was largely due to its heavy corporate debt burden, the report said. Fitch said New Zealand's net external debt was also an issue. "Net external debt is included as an additional indicator of de-leveraging risk, as it captures the extent to which residents (private and public sector) are indebted, in net terms, to the rest of the world. Spain, Australia and New Zealand look most exposed on this basis, closely followed by the US, UK and Denmark," the report said. The report outlined New Zealand's vulnerability to the housing and property sector, labelling its exposure to the sector as 'high'.

"This analysis highlighted economies most vulnerable to falling house prices and to balance sheet pressures weighing on consumer spending, but the results are also likely to be a fair approximation of the potential for asset quality deterioration in mortgage loans. The rankings...also incorporate actual house price movements since mid 2007 and the latest data on relative household debt levels. New Zealand, Denmark, the UK, the US, Ireland, Australia and Sweden exhibit the highest vulnerability," the report said. Fitch said that if distress did intensify in New Zealand's banking sector then local banks' foreign currency liabilities would lead to greater monetary and exchange rate pressures. "The lack of reserve currency status for Denmark ('AAA'), New Zealand ('AA+') and Sweden ('AAA') could result in greater monetary and exchange rate pressures in the event of an intensification of distress in local banking sectors, particularly given banks' foreign-currency liabilities. But at this stage there is little indication that local financial-sector distress will intensify, and therefore these sovereigns are well-placed to benefit from the (eventual) global economic recovery," it said. The report said New Zealand's medium term policy flexibility was strong, but that its near term financing flexibility was weak. "The ability of governments to sustain large primary surpluses necessary to reduce debt over the medium term depends partly on the parameters of the fiscal system. While a high revenue/GDP ratio is a signal of a deep and well-functioning tax base, it can also constrain the government's capacity to consolidate the budget through higher taxes. Garnering political support could be tougher if the workforce is already heavily taxed, while high and rising marginal tax rates can damage growth potential," Fitch said. "On the expenditure side, a high share of non-discretionary items in the budget "” including interest and pension expenditures, which are very difficult to adjust in the short to medium term "” can also be a barrier to consolidation. Based purely on a ranking of these three fiscal parameters, Ireland, Australia, Luxembourg, New Zealand and the UK have the highest degree of fiscal flexibility and France, Belgium, Germany and Sweden the least." "Financing flexibility allows governments to fund financial-sector support and pursue counter-cyclical fiscal policies, as well as the time necessary to restore public finances to health." "(It) relates to the capacity that sovereigns have to increase their balance sheets sharply in the short term to respond to economic and fiscal shocks. This is to a large extent related to the size of the economy, the stock of financial and real assets, and global reserve currency status."