Opinion: Bernard Hickey says New Zealanders would have to break the habits of a lifetime to win back a AA+ credit rating

Opinion: Bernard Hickey says New Zealanders would have to break the habits of a lifetime to win back a AA+ credit rating

By Bernard Hickey

Snap quiz time: what was a bigger blow to New Zealand last week? Dan Carter's torn groin muscle or the double downgrade of New Zealand's credit rating?

Judging by the amount of talkback airtime, the placement of headlines and the vox pops on New Zealand's streets, most people were more shocked and worried about the torn abductor than they were about the downgrade by Fitch and Standard and Poor's of New Zealand's sovereign rating to AA from AA+.

That's understandable given Carter's talismanic standing in the biggest sporting festival in our history, but it's a strange anti-climactic feeling given the warnings, the fear and all the budget cuts done over the last three years to avoid this very thing happening.

The relatively subdued market reaction seemed to reinforce the sense that maybe it didn't matter all that much after all.

The New Zealand dollar fell from over 78 USc early last Friday morning to 74.6 USc by Wednesday, but has since rebounded to around 77 USc by the end of this week.

Wholesale interest rates were actually lower one week after the downgrades than they were beforehand.

The government's bond auction on Thursday saw yields on its 10 year bonds rise just 13 basis points from a week earlier.

Treasury's warning in 2009 that a credit rating downgrade would increase government, household and business borrowing rates by 1.5% is not playing out this time.

Does that mean we have nothing to worry about? Do we actually need a AA+ credit rating?

It could be argued the reaction to the downgrade was anticipated by markets and that the selloff had already happened. Markets drove the NZ dollar down from 88 USc in early August to 78 USc by the time the downgrade.

Credit Default Swap spreads for Australasian Corporates, which means the Australasian banks, also rose more than 1% or 100 basis points to over 200 basis, which is as high as they got at the worst of the Lehman Bros crisis.

At the moment there is not much pressure for the banks to pass on those costs in the form of a floating mortgage rate hike without an Official Cash Rate to go with it. The banks' lending growth and their funding needs are much more subdued than they were in late 2008. They also have more cash on hand and have plenty of capital behind them. But if the crisis extends well into 2012 then eventually those costs will hit New Zealanders in their back pockets.

So what would New Zealand need to do to recover its AA+ rating and avoid that pain for borrowing costs, not to mention the pain for buyers of imports such as petrol from a lower New Zealand dollar?

Finance Minister Bill English spelled out the "huge challenge" of retrieving the AA+ rating in parliament this week. He said New Zealand would need to run sustained current account surpluses. Think about what that means for a moment.

New Zealand would need to spend less than it earned. It would have to stop borrowing overseas. It would have to stop selling assets to foreigners. New Zealanders would have to change habits and economic structures that have encouraged us to run current account deficits for the last 40 years.

We would somehow have to disable the enablers of foreign borrowing through our banks and the easy asset sales to foreigners for high prices. It is possible and some policies are being considered that would go some way to achieving that. The Reserve Bank is looking at some so-called macro-prudential tools that make it more difficult for banks to fund themselves on 'hot' overseas money markets.

The Government has edged towards making it harder to sell large chunks of land to foreign investors. But nothing too serious has been done to turn off the consumption and borrowing tap.

That's a pity. Unless we do change those habits of a generation we face higher borrowing cost and slower economic growth, both of which will make it harder for us to pay the really big bill looming in the form of health care and pension costs for our retiring baby boomers.

Standard and Poor's mentioned this fiscal timebomb in its downgrade. That's the real challenge for whoever is in government from November 27.


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?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Comment Filter

Highlight new comments in the last hr(s).

Not charts, %, statistics, etc - what it needs – real job opportunities for Kiwis - a new approach of economics with revolutionary reforms under the philosophical viewpoint of ethics and morality.

There is only one way we can turn this thing around.

Because of unethical and unmoral reasons killing societies, a number of almost insolvable problems occur. One example:

I invite you to read these documents (link). We are now entering a situation where worldwide governments/ businesses suffer under various problems. Operational and financial stress is obvious. This will lead into the decline of quality and safety within many economic sectors. As you can read with documents expenses caused by climate change, natural disasters will increase rapidly and with clear defined man made catastrophes/ disasters combined, cause prohibitively expenses. 


There is only one way we can turn this thing around:


Bernard it doesn’t need just a finance minister, Bollard, an AA+, more legislation, more government,macro-prudential tools. etc. We need to be a society with strong ethical and moral principles, which need to be recovered/ discovered by solid public debates. First we have to find out – not the government, but as citizens - as a nation - where we want to go.

Positive culture changes developed by the people forces the government into honest reforms – otherwise current Mickey mouse policies by the government just continue.

Gummie's here , to give you lots of " thumbsy ups " , Walter . .

.. I am so glad that you apologised to Bernard for his terrible behaviour , and that you're back on board ......

One big happy family again ........ aaaaaaaaaaaaaah !

 Roger, yes we both have a very apolostistic blood vessel.

I pointed you and me with one more. Bernard- I'm still waiting for a reply - so I can not give him a point, but I want to.

 PM Key on the oil spill


 Really interesting in connection how our politicians make important decisions for the country, but don’t front up, try to evade, even refuse to take full responsibility for their decisions. Another case Pike River.

Hon HEKIA PARATA: Maritime New Zealand is responsible for ensuring New Zealand is prepared for, and able to respond to, marine oil spills. The Marine Pollution Response Service consists of internationally respected experts who manage and train a team of around 400 local government and Maritime New Zealand responders. New Zealand has equipment and other stores strategically located around New Zealand. In addition, the Marine Pollution Response Service assists regional councils with exercise and oil spill equipment. The plan is responsive and is regularly evaluated to ensure it meets changing risk profiles. Should the pattern of oil exploration............

read on:



 When economies fail – costing billions.

 Yes – they say a lot and end of the day nobody makes them accountable, these people (politicians) are even allowed to make their own investigations about their failures.

 The safety record has been excellent, with no serious harm incidents suffered by staff or contractors since the access road began three years ago


 When we have in this country a PM, who makes promises he never can fulfill.

PM – where are the 130’000 new jobs coming from, when you are constantly importing things in the billions ?

PM – in what industries are Kiwis, particularly, NZyouths going to be employed, when your government constantly taking away interesting, skilful jobs to overseas workforces ?

PM – why do we have in this country youth education programs costing taxpayers money millions, when there are no decent jobs and our youngsters are forced to move overseas ?

PM – how can we have a solid, more complex, better coordinated production sector, covering our needs, when you import them in the billions ?


Hon Darren Hughes: Why did he suggest yesterday that the new electric multiple units are high-tech and much more challenging to manufacture than conventional carriages when the Business and Economic Research Ltd model already has the engines, bogies, and electronics being sourced from overseas, which would leave 70 percent of the work to be done by our skilled Kiwi work force?

Hon STEVEN JOYCE: Because these are highly specialised pieces of equipment. They are very high-end units, which have never been built in this country before. I note that a previous Government, which the member represented, also took that view, because it bought the trains for Wellington from Korea, rather than having them built



 How much do politicians want to know about public opinion ?

 Rt Hon JOHN KEY (Prime Minister): Yes; as I said yesterday, the impacts need to be kept in context, as our water quality is ranked second only behind Iceland, with a score of 99.2

Please, read on:


 Do our politicians really know what the NZpublic wants or are they just to much influenced by lobby groups ?

 To summarise my thoughts: I think our rating has a lot to do with our culture - ethical and moral principles. These values are decisive if our economy performs or not.

Solutions are the main cause of problems.  Get a bad credit rating, learn to live within your means and stop trying to borrow your way to prosperity.  The problem was the economy, the solution was to borrow, now the problem is the borrowing, the solution is to repay, the problem is deflation, the solution is to borrow.  You can get technical but the solutions cause problems.

Quite so skudiv. Our current account deficit is a direct result of previous borrowing-to- consume and would be far worse if not for record low interest rates.The trade balance is mildly positive - thanks to record high terms of trade - but we still have to borrow to pay the interest on previous borrowings and profits to the foreign owners of our assets. Borrowing to pay the interest - what a balls up!

That borrowing (to make up for the current account deficit) must show up on the balance sheets of households, Government or businesses. So, in the absense of private sector borrowing the Government must run deficits. I'm surprised the Government doesn't make this more clear to people. To reverse this downward spiral our only real option is to generate massive trade surpluses. A huge ask with all of our trading partners facing economic problems of their own and an urban population consuming 80% of imports and producing 20% of exports.

Gold is the currency of Kings, Silver is the currency of Lords, Barter is the currency of the free man and Debt is the currency of Slaves

John Key has is planning to increase our public debt by over 200% in real terms.  At the same time debt is imploding all over the world while our Prime Minister claims he is the best man to make wise financial descisions.

The advantage for real people when they have a bad credit rating is that they can't go into debt.  They pay no interest to no one.  The best thing Greece could have done when it first got downgraded was stop borrowing.  A few years later and now they will default, they have got less money now then they did when they first got the downgrade, and they have more debts, which means that the little amount they can repay will be greatly dilluted.

The reason we got a credit downgrade was the same reason Greece did.  We both had a good credit rating!   A credit rating measures how likely you are to repay your debts, obviously we are not likely to repay all of our debts but we will repay the main ones so we still have a not bad rating.  The fact that we got so far into debt with a good credit rating that we had to have a downgrade gives me some idea of how lenders view risk.

The risk to lenders is that instead of being repaid in money they will be repaid in hard assets.  Given the fact that they are still very keen to lend us money at low interest.........