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.