By Alex Tarrant
Standard and Poor’s decision to put New Zealand’s AA+ rating on negative watch has sparked a blame game between National and Labour as to what led the rating agency to make its surprise move.
The Labour Party expectedly laid the blame at the feet of the National government, saying its inability to solve New Zealand’s poor savings problem was the root of the cause.
Meanwhile, National says changes in the international situation – it cites Ireland’s problems as the main culprit – led S&P to change how it assessed private sector risk, and, seeing as most of New Zealand’s external debt is owed by the private sector, that was what caused S&P to make its move.
In the red corner
Labour Party finance spokesman David Cunliffe said the government had failed to solve New Zealand's private sector debt and savings problems.
"Standard and Poor's has been very clear that National has failed to deliver on two crucial economic fundamentals: closing the yawning domestic savings gap and closing down New Zealand's growing international debt, with Treasury forecasting the current account to return to unsustainable levels," Cunliffe said in a statement.
"Because that debt is overwhelmingly private debt, the Government cannot solve the problem simply by trimming its own budget,” he said.
Labour Party leader Phil Goff told journalists this morning the problem stemmed from government cutting Kiwisaver, and halting superannuation contributions to the 'Cullen Fund'.
"It’s about inadequacy of savings," Goff said. "This government cut savings through Kiwisaver, cut savings through the Cullen scheme."
"What the credit agency has said is that this country is not saving enough. If you need to save more, then your first action ought not to be to cut the programs that actually encourage savings," he said.
Goff then pointed to the government deficit, which expected to be around NZ$13.3 billion this year. "After 15 years of a government running a surplus, we’ve had two years of deficit, and contributing to that deficit was NZ$14 billion in tax cuts. The government has to take responsibility, it has no plan, and that’s reflected in that credit downgrade,” he said.
And in the blue corner
Finance Minister Bill English shrugged off Goff's comments as "nonsense". He said the issues S&P raised were being focussed on by the government, and that the agency had previously essentially endorsed the government's policy program.
"I think what’s happened is that because of the Irish bailout, the financial markets, where we borrow billions of dollars a year, are more sensitive to how much debt countries have," English said.
“New Zealand has one of the highest rates of external debt in the developed world, so they’re getting a bit more sensitive about that," he said.
Asked whether the move would raise the cost of New Zealand's overseas borrowings, English said the negative outlook was a warning. "Over the next few years you are going to see developed country governments borrowing enormous amounts of money and we’ll be out there competing with the UK, and the US will be borrowing hundreds of billions, and it would be better if we weren’t [having to compete with them]," he said.
"It would be better if we had less overseas debt, and this is a bit of a warning that over the next few years it could get a bit tougher, but the agency essentially endorses the government’s policy program - they think we’re roughly on track.
"I think we’ve been making more progress than they do," English said.
Shouldn't govt lead by example?
English was asked whether the government should be leading by example by cutting its debt. He said, on the one hand government could see the need to increase national savings, but on the other hand it had been determined to cuishon the economy through the worst of the recession.
"That phase [of cushioning the economy] is really over now," English said. "This will be our biggest year of cushioning the recession – we’re borrowing about NZ$13 billion to pump into the economy. We’re looking ahead to the next phase which will be about government improving its own performance," he said.
"One of the things [the Savings Working Group is] likely to say is the government needs to improve its own savings performance. At the moment we’re running a very large deficit, and I’m sure they’ll tell us, as Treasury’s telling us, we need to rein that deficit in reasonably quickly over the next three or four years."
"Government debt will be increasing for the next three or four years while we’re still running deficits, but those deficits need to shrink from here on. This kind of comment from S&P is simply a warning that the world financial markets where we borrow money, both the government and households through the banks, are pretty sensitive to debt levels," he said.
"If there [are] further problems behind the Irish bailout, and Europe, then they’ll become more sensitive."
Should we be listening to Standard and Poor's given the critisism it received over the subprime crisis in the US?
Asked whether we should listed to, or trust S&P given its track record in the run up to the US subprime crisis., English said, "the ratings agencies have views that are important to the people that lend us money, because people who lend us money listen to the rating agencies."
Odd statements from S&P
An odd aspect about the S&P announcement was that bank credit in New Zealand was "pretty sound and been improving," English said.
"There’s been some international concern about whether the Australian banks might be dealing with a housing bubble. That’s arguable - that if something dramatic happened in the Australian housing market that could affect the stability of our banks," he said. "I don’t think anybody regards that as a realistic possibility."
"Those statements are a bit of a puzzle. Twelve months ago you could understand it, 12 months later, the banks are in a better position, the New Zealand government’s in a better position, that’s why the statements are a bit of a puzzle,"
Quake, SCF bring NZ to world's attention for wrong reasons
The Canterbury earthquake and failure of South Canterbury Finance had brought New Zealand to the attention of international markets for the wrong reasons, English said. "Nothing’s really changed here. There have been a few problems like the earthquake and South Canterbury [Finance], but those are manageable."
"What has changed is that the international financial markets have just become more sensitised to how much debt countries have, because of the Irish bailout and the potential for more problems in Europe," he said.
"As it happens we have one of the highest levels of external debt in the developed world, alongside countries that are getting a lot of attention now, like Portugal and Ireland and Greece."
We're all in this together
English was asked whether the cost of the government's borrowing was being held to ransom by high private sector debt, seeing as the government thought S&P's announcement was due to debt levels in the private sector and not government debt.
"We’re all in this together," he said. "So the performance of the government is important, but equally the changes in the way New Zealanders are spending and saving are important.
"The good news is New Zealand households are changing their ways, we’re yet to see if that’s permanent. The government’s got more work to do to change its ways to reduce its spending," English said.
See Prime Minister John Key's comments yesterday on the move here.
Is it a verdict on government policies?
Later in Question Time on Tuesday, Cunliffe questioned why S&P had made its move. This from the uncorrected transcript:
Hon David Cunliffe: Does he still maintain that the removal by Standard and Poor’s of the negative watch following his 2009 Budget was a “verdict” on that Budget; if so, does he now admit that downgrading the outlook can only be a verdict on the policies he has implemented since that date?
Hon BILL ENGLISH: To the first question, yes; in respect of the second question, no. Most people who have observed this situation are a bit puzzled. In fact, last year we had conditions where the statement that Standard and Poor’s has made might have been warranted, but most of the imbalances it refers to in the statement are better now than 12 months ago, when it lifted the negative outlook.
Here is Labour Finance Spokesman David Cunliffe's statement below titled "National fiddles while credit rating outlook burns." It was made after Standard and Poor's put New Zealand's credit rating outlook on negative and Prime Minister John Key responded by saying S&P was reacting to international market turmoil.
Standard and Poors have decisively rejected National's economic approach by returning New Zealand's sovereign credit rating to negative watch after just eighteen months at neutral, says Labour’s Finance spokesperson David Cunliffe.
"After 18 months of empty growth projections, broken promises and unaffordable tax cuts, National has no-one to blame but itself," David Cunliffe said.
“Standard and Poors is clearly worried that updated forecasts due to be released next month will show growth forecasts being revised downward.
"Standard and Poors has been very clear that National has failed to deliver on two crucial economic fundamentals: closing the yawning domestic savings gap and closing down New Zealand's growing international debt, with Treasury forecasting the current account to return to unsustainable levels.
"Because that debt is overwhelmingly private debt, the Government cannot solve the problem simply by trimming its own budget,” David Cunliffe said.
“Strong action was required to lift economic growth and tax receipts, targeting tax cuts where they were needed at the same time as dealing with New Zealand’s savings problems. Instead, National's tax cuts pandered to its wealthy constituencies and added billions to public debt, much to Standard and Poors’ dismay. National also cut KiwiSaver and suspended contributions to the Super Fund.
"It has taken a gob-smacking two years to even set up a committee to look at the massive savings gap that Labour has consistently highlighted as a crucial need.
"Even before the Savings Working Group started, Bill English ruled out Australian-style strong savings policies, despite evidence that Australia's huge local savings pool has been a key driver of growth and rebuilding,” David Cunliffe said.
"Meanwhile the Government's economic growth policies have been laughable --- like the cycleway to nowhere or mining national parks --- or non-existent such as the complete vacuum of economic development policies in key sectors and regions. "Like a possum caught in the headlights National's monetary policy has been frozen in outdated free market orthodoxy, while all around us global financial markets are in turmoil and local manufacturers wither on the vine facing a rapidly rising Kiwi dollar," David Cunliffe said.
"Little wonder business tax receipts have plummeted 22.4 percent below latest forecasts and confidence is low, despite a 30 year record high in commodity prices. Little wonder Standard and Poors have concluded National's economic medicine is not working. "Eighteen months after National trumpeted Standard and Poors’ earlier re-rating, National has squandered its chance, its economic reputation is in tatters and it has no-one to blame but itself," David Cunliffe said.
The New Zealand Manufacturers and Exporters Association later sent out this release on the the S&P issue:
Policy changes are needed to cure a declining foreign debt position say the New Zealand Manufacturers and Exporters Association (NZMEA). Standard and Poor’s has put New Zealand’s credit rating on negative outlook. Treasury Secretary John Whitehead has already commented that the Government needs to move into surplus faster than is currently forecast and this advice needs to be heeded.
NZMEA Chief Executive John Walley says, “John Key’s statement that ‘nothing has changed’ is precisely the problem. Although import consumption has dropped through the recession, the same old policy settings that encourage consumption rather than production are still there; we are not giving our exporters the motivation to earn our way out of trouble.”
“We have a policy framework that has caused New Zealand to have some of the highest interest rates in the world, attracting foreign capital, and tax distortions that encourage consumption fuelled by asset backed borrowing.”
“While these conditions remain we cannot expect a different result than the one we have seen for the past decades of ever increasing foreign debt.”
(Updates with NZMEA comment, more from English, Goff comments)
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