Credit rating downgrades take centre stage in Parliament's last week as Opposition parties lay blame with govt, National blames Labour

Credit rating downgrades take centre stage in Parliament's last week as Opposition parties lay blame with govt, National blames Labour

By Alex Tarrant

The government came under fire in Parliament today as Opposition parties Labour and the Greens sought to score points off Friday's double credit rating downgrade from Fitch and Standard & Poor's.

Parliament is in its final sitting week before rising for the November 26 general election. As a win for National looks likely, Labour is trying to lift its stocks by painting the downgrade as a sign of economic mismanagement by a government which had frequently attacked Labour's policies as likely to lead to a downgrade.

National and Labour blamed each other for the downgrade with the government pointing to current account deficits under Labour, while Labour said the National government had not done enough to ward off the downgrade. See Bernard Hickey's view on the Double Downgrade here.

Labour Party leader Phil Goff kicked off procedings by asking Prime Minister John Key how his comments in 2009 that a downgrade would raise interest rates by 1-2% compared to a comment yesterday that rates might not rise in the short-term.

Key responded by saying global markets were more nervous about lending in March 2009 than they were now and that a downgrade would have been damaging.

"The global situation is now quite different," Key said.

The proof was that bond yields for New Zealand today were unchanged from a couple of weeks ago, he said. However, over time interest rates could rise, Key said, which was why the government would always strive to have a higher credit rating.

'It's Labour's fault'

The Prime Minister then tried to turn the blame onto the previous Labour government for overseeing the build up in private sector debt during the housing boom through the 2000s, which the rating agencies had pointed to as their reason for downgrading the government's rating. New Zealand's net external debt rose from 64% of GDP in 2001 to 83% in 2008 "because of huge and persistent current account deficits," he said.

"I would be interested in hearing the view of the leader of the Opposition about whether he takes responsibility for that large build up in private sector debt, because...the current account deficits run under the previous Labour government...were incredibly high, they're off at around about 8% of GDP," Key said.

"I remember in 1999 Michael Cullen saying the number one thing he would address was the current account deficit in New Zealand," he said.

Goff pointed out the downgrade was the first for New Zealand in 13 years, and came three years after the government came to power, to which Key replied he was not responsible for what happened in Europe and the United States.

"Nor technically was I in government when there was the enormous build up in private sector debt. What I can say is both Fitch and Standard & Poor's have taken quite some trouble to actually mention in their press releases that the books of the government and the pathway of the government is not only on the right track, but that if any future government was to unnessecarily place more debt on the economy, as Labour is proposing, that is likely to be a very bad thing indeed," Key said.

New Zealand's credit rating was now the same as Spain's, Goff said, adding National had constantly derided Spain as being an economy in trouble.

"It may well be, it sounds logical," Key said before quoting a line from the Fitch release which noted New Zealand was well-placed among the world's highly rated sovereigns.

"I will say this," he added. "When Standard & Poor's were giving a meeting in New Zealand about a month ago, what they did say was there was about a 30% chance we would be downgraded - that's what happens when you're on negative outlook. They did go on to say though, if there was a change of government, that downgrade would be much more likely."

'Raise the retirement age'

ACT's John Boscawen then asked the Prime Minister about "emerging fiscal pressures" raised by Standard & Poor's, and whether this warranted a rise in the retirement age.

The government was comforable that the costs imposed by the retirement age, which were modeled out to 2025, were affordable, Key said. "That's about as far out as we need to go."

'It's Labour's fault'

It was then Finance Minister Bill English's turn to field a patsy question from one of his own MPs on the government's credit rating, noting New Zealand's rating had been AAA up to the early 1980s, and dropped down to AA- in the late 80s and into the early 90s before steadily improving through the 1990s.

"And it's disapointing to see that the mis-judged economic policy through the last decade has led us to the situation of a further ratings change," he said.

"The ratings agencies have stressed for some time that their view of New Zealand is determined by New Zealand's large external liabilities, most of which is private debt. It has built up gradually over several decades, but in the time from 2000 to 2008, we had record excessive government spending, we had a current account deficit of over 8% for four years, which is almost a record for any country. During that time New Zealand households were spending around  NZ$1.11 for every dollar that they earned, and the tax system was encouraging rampant debt-fuelled property speculation.

"Since then the government has taken several measures to change these dynamics in the New Zealand economy with some success. But because of the deteriorating global outlook, ratings agencies have become more sensitive to what are now lower external debt levels," English said.

Labour's finance spokesman David Cunliffe raised the point that Finance Minister Bill English was Associate Treasurer in September 1998 at the time of the government's last sovereign rating downgrade. Yelling across the house later, Cunliffe gave English the title "Minister of Downgrades".

"I'm very pleased that was during a period when New Zealand made considerable progress in productivity growth, in export growth and employment growth, and that was all squandered by the Labour government who came afterwards," English said in response.

Can we trust the forecasts?

It was then Labour deputy leader Annette King's turn to question English about the upcoming forecasts for job creation in the Pre-election Update due later this month.

Treasury's projection of 170,000 jobs created over the next four years still looked feasible, English said.

"I don't expect the projections will be greatly different from those in the Budget," he said.

'We need a quake levy'

The Green Party chimed in, by questioning the government's unwillingness to impose a levy on taxpayers to help pay for the Christchurch earthquake rebuild - something the government is funding through borrowings. A levy on taxpayers would have reduced the government's borrowing requirements and therefore New Zealand's net external debt, which could have helped placate credit rating agencies, Green Party Co-Leader Russel Norman said.

Although Finance Minister Bill English continued to dismiss the levy idea, he praised the Greens for being more economically logical than Labour. This cordial approach from the Finance Minister had Labour MPs yelling across the House about the possibility National might be forced to call on the Green Party in order to remain in government following the election as its coalition partners ACT and the Maori Party were looking like returning fewer MPs than in 2008.

Norman had asked English how much the weekly cost of borrowing would rise for someone with a NZ$300,000 mortgage if their interest rate rose 0.3% due to the ratings downgrade. The cost would be about NZ$17 a week, English said.

Norman argued that would be much higher than NZ$1 a week an average-wage earner would pay for the Green Party's earthquake levy. He asked the Finance Minister whether he had seen the Standard & Poor's comment that the responsibility for the downgrade laid in part with the government because "the country's fiscal position has been weakened by Christchurch earthquake-related spending pressures."

English said he did not think that was the case, and said a levy would not have made a difference to earthquake funding enough to change the ratings agencies' decisions.

"The fact is that the levy as he proposed...simply wouldn't have raised the cash needed now to meet both the welfare requirements, the payouts for instance for the redzone, the ongoing funding of infrastructure rebuilding, the ongoing operation of EQC, which is now very large. It simply wouldn't have raised the cash in time," he said.

"There will of course be effective levy increases as a result of the earthquake. People who are renewing their insurance premiums right across New Zealand are finding that, and it's likely the EQC levy may have to increase significantly as well."

Dow Jones reported Standard and Poor's said it would have downgraded New Zealand even if there had not been the devastating earthquakes over the last year.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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...and the tax system was encouraging rampant debt-fuelled property speculation. Since then the government has taken several measures to change these dynamics in the New Zealand economy with some success. But because of the deteriorating global outlook, ratings agencies have become more sensitive to what are now lower external debt levels," English said.

Ergo: National still haven't done enough to dampen down property speculation, implied by the ratings agencies in their down grade. So Natioanl must have more work to do on that score...after the election...otherwise...we could get another set of downgrades...and they WOULD hurt.

While National have probably done as much as they can, I think its a case of the tide going out and exposing the fallacy of private debt not mattering....The ratings agencies are victims of their own right wing politics and now after being slapped with that miss (private debt does matter) are trying to catch up....

"would hurt" yes....but maybe its what is needed, though after the "living wills" scheme is in place pls.....

regards

No buts, no maybes.

All the blame rests squarely on National ineptitude.

No amount of smiles and waves can push blame back three years or on the effect of external forces most of which even we poor ignorant sould here have been arguing about for a considerable time.

The prime effort is re-election first and second and there are no other aims.

The public will have no knowledge of 2008 but the position now is low hanging fruit for any astute opposition.

It may not be Goff but hopefully one of our more knowledgable journos (if we really have any) will latch on to this.

Doesn't have to be that way Iain ..........provided phill is prepared to fall on his sword he can pretty much revisit anything.....

Failing that there is always Nicky Harger........loves a good celebrity roast.

They're pretty much all hollow men, Count.

It's a case of the pot blaming the kettle for the gas bottle explosion.

Gee, having only read the headline - I can see it's a first in politics - the two major parties agreeing they're both hopeless.

And both being right.

LOL, spot on....

regards

Both parties are equally to blame labour for the irresponsible middle class welfare and implicit support of the housing bubble and national for the insufficient remediation

WFF, expanded in 2005 as a counter to Brash's right wing bribe......Cullen didnt want to, but had no choice.....so lets not blame just Labour for that.

Housing bubble totally agree, but just look at the USA or OZ (and especially OZ) and the Govns did and have porked the housing bubble....knowing full well it was needed to keep it and the economy inflated, so would National have been any different? I suggest not.

Remidiation, while I pretty much agree and more probably needs to be done I would suggest doing to much too fast is a sure way to pop the bubble IMHO....Look at how the market has performed in the last three years...a slow decline....so for me its hats off to National for not killing it.....now it maybe circumstance and nothing to do with National's "tweaks".

I know one thing, the tax breaks for PAYE PI investors still seems to be going on....but at least they are paying some tax unlike the top few % who dodge it by going for capital gains and hence tax free.

regards

Katherine Mansfield:

Risk! Risk anything!

Care no more for the opinion of others.

Do the hardest thing on earth for you.

Act for yourself.

Face the truth.

Neither Labour or National (and probably none of the others) are capable of facing the truth - that they are both (all) responsible, and the primary problem.

As such nothing is going to improve significantly until both Labour and National are replaced.

Labour rewrite history to please themselves because they know silly Kiwi has a ten minute memory span. National have discovered they know bugger all about macro economics and the greater worldwide financial debt farce wrapped up in used toilet paper...or so it would seem.

English and Key continue to believe they can spin a 'happy days will be here again' tune that will carry us across to safety, when it might be better to be bloody honest as Churchill was to the Brits. Nothing but 'blood sweat and tears'.

In about 7 weeks the axe will swin down on the waste in the state sector. English will have one year at best to tear out Helen's legacy of splurging idiocy, otherwise we join the piigs.

The next three years will see Goff sent down the road along with several other old farts in Labour's sinking ship. The in fighting will leave national still in office post 2014. The real test will come in 2017 because by then the pain will be greater than the memory of Clark and we could well find the socialists return to office on the back of promises to everyone they cannot keep.

"English and Key continue to believe they can spin a 'happy days will be here again' tune that will carry us across to safety"

and if Labour's showing in the polls is an indication (about 26%) v National's its working...

2 or 3 years of instability and hardship (for some) results in the desperation of voting for the ones promising them the land of milk and honey....

Shows how shallow and stupid the voter is.

regards

This is laughable and two faced by Phil Goff, NZ's problem is the private external debt.  His Govn allowed NZers to run up for 9 years....apart from ignoring the balance of payments issue and Peak oil....

National would probably have been as bad mind...

I suggest they look to their own houses.

regards

I believe that NZ need another downgrade in order to wake up to reality.  This is not the governments fault alone, the NZ public happily took on the debt believing that they deserved to make a killing for taking a risk on property with someone else’s money.  Pure greed with no long term thought process.

 Then again isn’t that why we have a government, to lead us and save the fools from themselves.  Even now the property market is still being propped up by more fools buying in at the bottom with large amounts of debt thinking that one day they will sell at a huge profit.

The government needs to come out and stop the game, simply state that they will do whatever it takes to avoid property increasing in value over the next 10 years, via opening up more land low cost housing, making minimum 20% deposit required for house purchase etc etc  they have the power use it

I dont think even another downgrade will impact how NZers think... a credit rating agency is too obscure a concept.....I mean we can see NZers pocket books are hurting long before this....I think it will hardly blip anything myself.....even another downgrade......

"fools from themselves" yes but that isnt happening....its all about getting re-elected....all about holding the middle ground where the swing voter is....and not losing votes.....so no policies that cost votes, ever.

I dont think there is any hope of property increasing in the next 5 years and in fact 20 or 30 years IMHO.....we will be lucky if we only see 4 or 5% drops per year aka Japan....Im betting on 10% drops per year for 5+ years....a 50% drop, even bigger....

Ilike the idea of a 20% deposit, Texas seems to have a 80% LVR and it seems to have done a great deal of good, however the voting impact of putting such a thing in place wont be on anyones table I think.....Which is a shame because handing that to the RB as a tool  and allowing them to vary it as well as or instad of the OCR would be a great weapon to have.....wont happen of course, costs to many votes, not unless its set at say 95% right now and then dropped at 1 or 25 per year...

Opening up land, this would have to be via some sort of compulsory enmass scheme to keep the present owners /  developers from artificially restricting the speed and sizes of land being made available....otherwise you just pass the monopoly control from Govn/council to land owners....result no change in cost.

Its simple really as someone said when asked how to fix things, the reply was I wouldnt start from here....its now probably too late and govns wont do a thing until forced.....

regards

"fools from themselves"

Yes, I agree, the core problems is that NZers are so short-termist and selfish.  No one dares to take away their tax advantages that lead to a hollowing out of the economy, their middle class welfare, or to their right to retirement at an unrealistic age.

Both Nats & Labour know that if they threaten Kiwi's personal lolly jar, & don't provide bread & circuses this week, they will be out on their ear.  So they are just responding to the average Kiwi psyche and national culture

Cheers

"fools from themselves"

What an arrogant statement! What makes some people think that they know what's best for somebody else? Why don't the arrogant "do-gooders" mind their own business without poking their unwanted noses into other people's lives and let other people decide what they want to do themsleves?

I guess ultimately it comes to the difference between left-wing total control inclinations and, at the opposite end, ideas of personal freedom and responsibility...

Alex13 - if responsibility was being demonstrated, it would be fine.

There's where your hypothesis falls down. The moment responsibility threatens the hip pocket, it goes out the window.

I call that immature. Too immature to be left to it's own devices, just as you don't let a child go free until you judge them ready.

 The other problem, is that if society has to address what is really up ahead, it may have to make moves that are indeed restrictive on 'freedoms'. If the failure to anticipate will result in the annihilation of the species, seems to me that is the overriding threat to freedom.

You need to see what is up ahead:

http://www.elmhurst.edu/~chm/onlcourse/chm110/outlines/topic1.html

Rebuttal - intelligent rebuttal - of the math invited.

To fail to learn is to remain ignorant, which I'd reckon the worst epitaph one could have.

cheers

PDK....are you for real....or just taking the piss.    " it may have to make moves that are indeed restrictive on 'freedoms'"......"it" being whom PDK?

Kindly do that homework.

You've had long enough.

Theree is no way ignorant, pocket-focused individuals can address that in 'severally' form. They would have had to have gotten there already - failure proven by default.

Key: "retirement age .... modeled out to 2025, were affordable"

That is of course based on the very rosy Treasury forecasts of strong growth based on limitless Chinese demand. 

I think that will turn out to be as reliable as the rock-solid ratings given to the banks during the noughties.

Somehow I think Key knows this also.  But it suits him to ignore it.

Cheers

But Philly...where would we be without models...we wouldn't need all the pointy heads to produce them...think of the govt depts dependent on keeping numbers up least the bloated salaries at the top shrink...dear oh dear. Sir Humphrey would have a piece of you.

How can you even think of saying such a thing, Sirrah!!

This is the same Treasury who managed the deposit guarantee scheme with widely admired skill and diligence!

Cheers

Never fear! after Nov election, the Greens will get their 10% and NZ credit rating will be down to B+ ...  Bet ya!

You could be right C Moa..clearly the young socialists prefer to leap aboard the pinky green wagon where they can quickly seat themselves in front of key and co..having dislodged the old labour farts currently filling those holes.

you gotta move away from the status quo wol. nat/lab/act are the problem, not the solution

Alex13 – there are plenty of fools out there, not saying everyone fits into that category but we certainly seem to have our fair share.  Have you ever heard of a thing called tragedy of the commons?  That’s ultimately what happens when you let people en mass decide for themselves.  Also law and order where does it stop, why do we have laws?

 People have behaved foolishly taking on more debt than they can handle and are continuing to do so.  A spades a spade

I hold the view that if national had done all that some who post see as neccessary, then we would not be heading into a comfortable Nat win, but an election that  resulted in a weak coalition with minor parties pulling the springs.

I believe tha National have keep a lot of their powder dry, have spent the last 3 years linning up the skittles and will give it full blast shorlty aafter the election result.

Thats would I'd be doing anyway..