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NZ Debt Management Office to monitor Moody's review of bank credit ratings, but any downgrade should have little effect on govt borrowing

NZ Debt Management Office to monitor Moody's review of bank credit ratings, but any downgrade should have little effect on govt borrowing

It is too early to guess what effect a credit ratings downgrade for New Zealand’s major banks might have on the Government’s cost of borrowing, although the situation will be monitored, the head of the New Zealand Treasury’s Debt Management Office says.

Credit rating agency Moody’s this week put New Zealand’s major banks on review for a possible ratings downgrade, due to a review of their Australian parents. Moody’s will also look at New Zealand banks’ sensitivities to wholesale funding markets, where they borrow up to 40% of their funding.

The announcement of the bank review comes after Moody’s indicated in January it was comfortable with the Government’s debt levels, although the rating agency did note potential risks from its reliance on offshore funding.

'Depends on whether concerns for banks flow on to govt'

NZDMO Treasurer Philip Combes told any effects on the country’s sovereign rating from the bank review would ultimately depend on whether any particular action on the banks flowed through to the sovereign rating.

“I think it’s certainly far too early to say whether there are any implications. I’d have to say at this stage it is most unlikely,” Combes said.

“As we found over the last several years, there’s been more volatility in bank funding rates by quite a margin than there has been in sovereign funding levels. What’s happening in the banking sector doesn’t have any great impact on the sovereign, unless you were talking about factors that were affecting the country as a whole,” he said.

However, if a downgrade of the banks led to a rise in borrowing costs, and that flowed through into economic activity, it was a possible there could be some small effect on the sovereign borrowing costs.

“The issue is, unless that’s significant, you’d just take that in the mix along with a whole lot of other factors that potentially impact on GDP growth, and therefore on tax revenue and the state of the Government’s finances,” Combes said.

“The fundamental point I’d make is there was a lot more of that sort of an issue during the Global Financial Crisis and that did have a more marked impact on GDP growth and the like. You’d expect anything now to be much, much less significant than anything we experienced back then,” he said.

Sensitivities to offshore borrowing had been around for quite some time, Combes added. What was new was the way the rating agencies assessed those sensitivities.

“It was exactly the same issue around Standard and Poor’s move to negative outlook for the sovereign [in November 2010].”

“In New Zealand, if anything, our external imbalances have been reducing over the last twelve months. But there’s no doubt there’s a heightened sensitivity by rating agencies to external vulnerabilities,” Combes said.

Happy to accelerate govt borrowing

Meanwhile, strong demand for New Zealand government debt, and historically low interest rates, meant the NZDMO had been happy to accelerate the government’s borrowing programme.

In the last two and a half months the NZDMO had three of its biggest tenders it had had for a long time, culminating in a NZ$950 million tender a few weeks ago, Combes said.

The Government says it needs to borrow on average NZ$300 million a week for its budget requirements.

“Our sense is that international demand - not just for Australian and New Zealand sovereigns, but also the banks as well – has been pretty strong,” Combes said.

“In that sense, we think that there’s some methodological issues that rating agencies are looking at, rather than economic conditions per se, because they [the conditions] are clearly better now than they were one to two years ago,” he said.

The recent large debt issues were “absolutely” due to increased demand rather than the NZDMO trying to get them in before markets possibly fell away again, although some risks did remain in Europe.

“We’ve done quite a lot of marketing mid to late last year, particularly into the Asian region, but also to London and the US. As a result of that activity there’s no doubt there’s been heightened interest in New Zealand government securities,” Combes said.

“We’re really keen to meet that demand with supply when there is strong interest from offshore,” he said.

Yields were also better.

“Historically yields have been around 6% for ten year bonds in New Zealand for most of the last decade,” Combes said.

That had got down to almost 5%. “Certainly we’ve been able to issue significantly below 6% for quite some time now,” he said.

“The combination of demand, plus historically low interest rates for borrowing out to ten years, has meant that we’ve been quite happy to accelerate our programme while conditions are good.”

Still risks in Europe

As the Government’s fiscal position improved as it moved toward surplus, the NZDMO would have progressively less to do over the next three years.

“From our point of view, while demand is there, it’s important to borrow, because there are risks – much more around what happens in Europe. There are still risks in the sovereign debt arena, and our view is that, while things have settled recently in Europe, there are still risks going forward,” Combes said.

“And there is still a lot of talk about the state of the US finances as well. So our view is in this sort of environment, it’s always good to borrow when yields are low and when you can, but there is no doubt that we’ll have less to do, progressively, over the next three years than we’ve had to do in the last couple,” he said.

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Slowly slowly catchee peasant.....the trap is about to be sprung...just when the best mortgage bait is offered to idiots...along comes the man from Moodys...BAM.....up go the rates and why might you ask!.....could it be that an economy addicted to debt...dependent on property bubble after property bubble....immigration followed by more immigration....urban spew after urban utterly in every possible way as buggered as a Possum run over by a 50 ton truck!

But don't let this put you off using that credit card....splurge like tomorrow will never buy buy....make that "lazy balance sheet" dance to the tune of the credit too can be a winner....pop in and see your bank manager today.....

"That frightened the hell out of the bond holders. Moody's realized its bank and debt ratings, which were based almost exclusively on the belief that no matter how insolvent a bank was,  no bank would be allowed to fail and no bond holder would be expected to have his lunch interrupted.    When Moody's realized this might not be true they announced the re-assessment."

But a funny fork in the road appears after a massive dose of free money: the free money flows into speculative bets on actual tangible resources, creating massive inflation and newly reflated asset bubbles.

As a result, the system is now facing the same old problem--asset bubbles held aloft by "free money" and rampant financial fraud--and a new problem: inflation in resources that sustain the real economy.

The Central State/Financial Elites are thus faced with an impossible choice: if they let the speculative free money flow, then their populations starve as prices of tangible goods such as food and energy skyrocket. Recall that the masses aren't provided with a trillion dollars at zero interest; that privilege is reserved for the Financial Elites who fund the Central State politicos.

The capitalist answer to this vast financial overshoot is simple: interest rates will rise once the unlimited free money stops flowing. Once interest rates rise, then the debt--which has now doubled or tripled in the frenzied flow of free money-- quickly becomes burdensome in the extreme.

In other words, the status quo is now addicted to unlimited flows of free money. If the flow continues, then inflation will destabilize it; if it's cut off, then rising interest payments will destabilize it.

That's why it's easy to predict a financial collapse in the next few years. But th



The current figures show that the growth of broad money supply is very low and is much lower than the growth of narrow money supply. This means that money multiplier is going down (as money multiplier can be expressed as a ratio of broad money to narrow money). The financial market keeps balancing itself and this causes high inflation. Therefore Bank of England faces unprecedented situation: the inflation is going up but raising interest rate would not stop it as the inflation is not a result of high broad money.

Raising interest rate is not a solution and Bank of Englad knows it. The problem is, however, that the money multiplier is so high that inflation caused by it is likely to be going up for a while. We are getting poorer thanks to the pyramid scheme engineered by the financial industry. The Bank of England Governor Mervyn King observed that "inflation could cause serious problems for families over the next three years". And in the meantime the captains of the financial industry keep rewarding themselves handsomely with the money raided from the middle classes since this is what high taxes, spending cuts and inflation are all about."Prime Minister, sort out this mess, please"

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