The credit rating downgrades have been quite a political earthquake, and the aftershocks are going to continue for some time.
If I was to quote from every interesting article this post would be a mile long, so I’m going to force myself to quote from only a couple. The kind of response that downgrades have caused is exemplified in opinion pieces such as these: Editorial: After Rugby World Cup comes harsh reality, Govt faces having to eat words after downgrades.
But for a real in depth understanding of the implications of the downgrades , you simply can’t beat Bernard Hickey*:
…Firstly, both Fitch and Standard and Poor’s are worried about New Zealand’s collective foreign debt, including both private (which means bank debt) and public debt. Their unspoken assumption is that these two types of debt could become the same thing over time, if the government ever had to bail out the banks. The ratings agencies have begun lumping the two types of foreign debt together in the wake of the Irish crisis where the government guaranteed the banks debts as soon as they got into trouble.
The ratings agencies have worked out in recent years that private debt pretty quickly becomes public debt whenever banking systems hit trouble because politicians can’t help themselves from bailing out banks. …
Secondly, both [rating agencies] think the government has not done enough yet to transform the economy from being a consuming/borrowing/importing economy into a saving/investing/producing/exporting economy. This has been the government’s big theme since the election. Its big ‘tax switch’ package and its tweaks to rules on rental property were at the centre of this ‘transformation’ policy. The trouble is it hasn’t worked yet and doesn’t seem to be working for at least a couple of years to come. …
No one should forget also that the government argued in the 2009 and 2011 budgets that its supposedly tough measures were designed to avoid a credit rating downgrade. This is clearly an ‘epic fail’ as the programmers might say.
Isn’t one of those classic definitions of madness doing the same thing over and over and expecting a different result? Govt says NZ credit downgrade won’t affect policies. So the Nats aren’t going to change their policy, but they have certainly changed their spin. After all the arrogant posturing and dire warnings on the effects of a downgrade, now that it has happened they are back-peddling like crazy – Downgrades unlikely to raise mortgage rates – Key (and English).
Key’s management of this issue has been appalling, and he’s getting called on it:
It’s hard to recall when John Key looked this bad.
He was this afternoon hosting what he called an ”election-free zone” – a one-hour radio talk show. .. But you have to think he might have reconsidered the wisdom of the stint after Lance Corporal Leon Smith was shot in the head and died in Afghanistan on Wednesday morning. And when news arrived this morning that, for the first time in 13 years, this country’s credit rating was downgraded by one of the three big ratings agencies, he should have cancelled. …
The situation descended in to utter farce when news broke – literally broadcast during Key’s talk show – that Standard and Poor’s had followed Fitch and knocked our rating down a notch.
”It’s the Prime Minister’s hour and we’re having a lot of fun,” Key continued.
Excuse me, Mr Key, but what’s fun about another Kiwi soldier dead, and a double blow to the economy? …
See also Downgrades hit National where it hurts for similar points. All in all it’s no wonder that the Nats are starting to get some political inoculation in place right away – National’s lead likely to disappear – English. Not that they probably need to bother – RWC more important than election for many Kiwis. Sigh.
Update: English now admits that the downgrade will push interest rates up (and is using it as an excuse for public service cuts) but, rather than the 1-2% predicted in 2009, English now says it would result in a rate increase of just 0.1%. No good explanation of the difference is forthcoming.
* Hickey’s piece also contains the following:
Essentially, the New Zealand government has been running a structural budget deficit of around 3-4 per cent of GDP since around 2005. This was created firstly by Labour, which cut taxes for middle income earners and delivered the middle class welfare of Working For Families and Interest Free Student Loans. National kept those policies in place and expanded the tax cuts to middle and upper income earners, slightly loosening fiscal policy as it went.
I don’t recall any middle income tax cut and I don’t recall any structural budget deficit (we were still paying off debt post 2005). It’s my understanding that our economic woes spring not from re-distributive policies, but from a speculative housing bubble, which lead to a build up in private debt, and lack of investment in the productive economy. So someone set me straight – where’s Hickey coming from here?