Key watching Aussie bank credit ratings as NZ govt downgrade showed how worried ratings agencies were about wholesale money markets

By Alex Tarrant

Prime Minister John Key is keeping an eye on the credit ratings of the big Australian banks after downgrades to New Zealand's sovereign rating from Fitch and Standard & Poor's last week highlighted how worried the ratings agencies were about international wholesale funding markets.

S&P is currently reviewing the methodology it uses to asses bank credit ratings, with the new criteria due out anytime now. That criteria could potentially lead to a cut in the ratings of New Zealand's big Australian-owned banks - ANZ, ASB, BNZ and Westpac - which are all rated AA. See: Standard & Poor's ratings revamp could see New Zealand bank credit ratings downgraded.

Australian banks and their New Zealand subsidiaries rely on global wholesale money markets for roughly a third of their funding, an exposure that was highlighted by the 2008/09 credit crunch following the collapse of US investment bank Lehman Brothers in September 2008. 

Global wholesale money markets froze in the months following the Lehman collapse, with the Reserve Bank of Australia and Reserve Bank of New Zealand having to step in to guarantee wholesale funding and provide a short term lending facility to help the banks access funds.

Finance Minister Bill English said on Sunday he thought the downgrades to New Zealand's sovereign ratings could add some cost to interest rates in New Zealand, but not as much as the 1-2% feared from a possible downgrade in 2009. See English says PM's 2009 comment that a credit rating downgrade would push rates up 1-2% was right at the time, but it's different now.

Key optimistic

Key was more optimistic about the situation. When asked yesterday what he thought the effect of the downgrades would have on New Zealand mortgage rates, Key replied he did not think they would be affected, at least in the short-term.

Key said NZ bank economists were still expecting New Zealand to attract capital, as it was still in a relatively good position compared with other developed countries that had received downgrades recently.

Speaking to media on Tuesday in Parliament, Key reiterated New Zealand was relatively a good country to invest in as Northern Hemisphere peers had been downgraded as well.

“So capital’s been flowing in. [But] what is also at play here is ultimately what happens to the banks and whether the Australian banks are downgraded. That’s always a risk,” Key said.

Ratings agencies had always been worried about New Zealand and Australia's external liabilities.

"We’re currently sitting at 69% of GDP, Australia’s sitting at 55% of GDP. So they are worried about the wholesale funding in the international markets," Key said.

"Both Fitch and S&P basically say one of the strengths of New Zealand is the Crown balance sheet. But the really important point there is, we need to restore that balance sheet to a healthy position as quickly as we can,” he said.

'80 US cents was always a little high'

Meanwhile, asked where he thought the New Zealand dollar was heading following last week's news, Key said it would be appropriate for him to make a prediction. The NZ dollar traded just above 75 US cents at 1:20pm on Tuesday, down from a post-float high of 88.4 USc at the start of August.

“What I said a couple of weeks ago was there was that there was a better than 50% chance that Greece would default, I stand by that view. If that takes place then obviously that will have some implications," Key said.

“What the rating agencies are telling all of us, is that we just live in a lot more volatile times, and ultimately that will have some impact. But I’d say the markets have priced a lot of this in,” he said.

The exchange rate was a double-edged sword. As it rose there was pressure on exporters, but meant import price such as petrol were cheaper.

“It’s a balancing act. The New Zealand dollar above 80 US cents is always a little high, so at these levels it’s still at reasonably attractive levels from an import perspective,” Key said.

'No parameters, but warnings on private debt'

Meanwhile, asked whether ratings agencies had set any parameters on what they considered the level of New Zealand's private sector debt should be, Finance Minister replied they did not. The government had made its own decision to try and keep net government debt within 30% of GDP, and not the ratings agencies, he said.

"With respect to private household debt, the only position they’ve taken there is they’ve quoted the UK and the US, which have had similar levels of household, or private sector debt, which have dropped faster in New Zealand," English told media on Tuesday.

"In the UK and the US, the reasons for that are reasons we wouldn’t want to have to deal with – they’ve had a collapse in the housing market in the US, and they’ve had big cuts in public sector and transfers to households in the UK. That decrease in household debt in the UK and the US is primarily driven by fear," he said.

In New Zealand there had been a more moderate and considered adjustment, which the government considered the best path to follow.

“We’re not run by the ratings agencies, we do what we believe is the best thing for the New Zealand economy...and they have an opinion about it,” English said.

'Better off without housing collapse'

"With household debt, the government doesn’t have direct control over that. That is a whole lot of decisions made by New Zealanders running their day-to-day lives. The fact is they do respond to a general shift in the environment, and a shift in incentives. So they can see that too much debt’s too high, so they are gradually starting to pay it off. Low interest rates are giving them that opportunity," he said.

"They’re getting a pretty clear message from government because we’ve changed the tax [mix] around to cut the tax on savings, investment and work, and increased the tax on consumption. That’s telling them, spend a bit less, you’ll do better out of saving and out of paying off debt. I think they’re responding to that.

"The ratings agencies might have wanted to see a US-type adjustment, but frankly I think we’re better off without the collapse in the housing market that they’ve had in the US," English said.

(Updates with comments from English).