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Downgrade aftershocks continue

Written By: - Date published: 8:44 am, October 4th, 2011 - 53 comments
Categories: economy, election 2011, john key - Tags: ,

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 realityGovt 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*:

What did double-downgrade day really mean?

…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:

John Key’s talkshow farce

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?

53 comments on “Downgrade aftershocks continue”

  1. vto 1

    Well it was said before and it will be said again…

    If the ratings agencies have determined that private bank debt is, in their eyes, public government debt because the government will step in and save the banks then best we step in and take not just the debt but, being fair and just about it, the equity as well.

    Can’t just expect to have one without the other. Again.

    Come on folks, wake up to the world of banks and their machinations. The politics will be the politics – you can see it all coming due to its predictability, no matter left or right government. It is the banking system we have that is the problem. It is the most insolvent industry in the entire world. It is also the most highly leveraged. It is the dange zone. Pull your money out – especially from any foreign-owned bank like BNZ, ANZ, Westpac, ASB, HSBC.

    • Deadly_NZ 1.1

      And finance companies don’t forget the huge bail outs there as well and for what to payback investors who knowingly put their money in

  2. Draco T Bastard 2

    No good explanation of the difference is forthcoming.

    Of course not. National and Act have NFI how the economy works so all they ever do is pull numbers out of their arse and then act surprised when they’re wrong.

    I don’t recall any middle income tax cut…

    Neither do I. WfF was introduced because people couldn’t afford to feed their families. It’s got to say something quite bad when a nations middle class is suffering from dire poverty.

    Quoting Bernard Hickey:

    Secondly, both 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.

    And it never will work. Tax cuts for the rich don’t fuel economic growth. What they do fuel, and Hickey mentions this, is a lot more consumption and more buying up of property by the already rich.

  3. And to think NZ is doing so bad when the rest of the world is doing so good, must be Keys fault.

    • One Anonymous Bloke 3.1

      Oh too funny. When there’s no evidence one way or another he’s a financial whizkid, who will turn the country around and bring us into line with ‘stralia. Now the evidence is in it isn’t his fault, the dog ate his homework, he left it on the bus, pathetic pathetic pathetic.

      Rating agencies are all about long-term out-look. They looked at the long term outlook for NZ, and saw a double dipping incompetent of a finance minister who looks like being re-elected, and they made their call. Spin it however you like, it’s covered in failure sauce and everyone can see it.

      • Brett Dale 3.1.1

        If all it took was for financial whizkids to turn this thing around, then I think the whole world will be doing better.

        • felix 3.1.1.1

          So he shouldn’t have made that his qualification for being elected then.

          Right Brett?

          And you’d be an idiot to vote for him on that basis too. Right?

    • I heard somewhere (can’t remember where) that 25% of countries have had credit downgrades since the recession began. We’ve therefore joined a minority of countries in terms of downgrades.

      It would be interesting to see a list of those countries that have been downgraded – to see the company we keep. 

  4. Richard 4

    The NZ Dollar is falling in value, and people are going OMG

    However they forget all the warnings that the NZD was overvalued significantly, and was only held up because of foreign investors. However, now that these investors are looking to safer markets for their investments, theyre dumping NZ Currency.

    A NZD value of 0.65 USD is probably to be expected, and will help exporters greatly… however, prices of pretty much everything will go up as Petrol and Diesel will go up. This on top of National’s GST increase ‘which doesn’t really count’, will really count in hurting low and middle income kiwis

    • KJT 4.1

      It would be funny if it was not so serious.

      NACT cannot even meet performance targets from, the totally discredited, “credit rating” agencies.
      Agencies which are on the side of the same economic dogma as NACT.

      This could have been avoided simply by legislating that no private finance companies would be bailed out.

      The New Zealand Government, like, the other failing States, Ireland, UK, Greece and the US etc, has made it obvious that private finance debt is a taxpayer liability.

      Look to Argentina and Iceland to see the benefits of telling the banks to get stuffed. Argentina, one of the worlds fastest growth economies since 2002, when they told the banks to take a bath.

      Noting that most lenders to Governments have taken no notice of States credit rating downgrades recently.
      Government bonds are still considered much safer than private lending.

      One of the reasons for the continuing recession in the USA. The cashed up prefer to lend to the Government instead of industry and development. Government lending at 0% intended as a stimulus is being invested in 3% yeald Government bonds.

      Meanwhile the Media have had almost no coverage of Nationals failure to succeed, even under their own terms. If we had a credit downgrade under Labour it would have been frontline news.

      A rugby players nuts are more important!

  5. Lanthanide 5

    “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?”

    This is just Hickey’s bias against WFF and interest free student loans rearing it’s head, yet again. Basically those two policies were fully implemented after the 2005 election and because he thinks they’re bad policy and should be repealed he’s saying that’s where the structural deficit came from. Frankly I find his position on these policies rather strange. WFF is obviously a tax-cut aimed at the middle classes (which he seems to acknowledge is where tax cuts should go, not to the top). He also repeatedly goes on about our graduates going to Australia for jobs, but I would’ve thought that interest-free SL were a strong motivation for them to stay in the country.

    There were no tax cuts until Oct 2008 which were largely a result of National’s incessant bleating, although I’d suggest that even without National bleating Labour probably still would have done something although perhaps not to the extent they did. My only guess is that again Hickey is interpreting these cuts as “inevitable” and a result of the 2005 election and therefore the structural deficits started then, and not when National took office. This interpretation would seem to fail at the first hurdle though, because Brash was campaigning for big tax cuts in 2005, so he would have actually crystallised a budget deficit much sooner than the one we got 2008-2009. So I can’t really make heads nor tails of his specific mention to tax cuts.

    • KJT 5.1

      I agree with Hickey about working for families. It is effectively a subsidy from employers and their employees who pay decent wages to those who do not.

      WFF allowed employers to avoid long overdue wage rises and remove even more profits offshore.

      Unfortunately Labour was as stuck in the Noe-Liberal paradigm of “privatise the profits, socialise the losses”, as National.

      • Lanthanide 5.1.1

        I agree that it subsidises bad employers. But the fact is, people actually need money to live. I wonder what the social stats would look like, particularly in terms of child poverty, if we did not have WFF?

        Employers don’t seem to have gone out of their way to pay people reasonable wages before WFF was introduced, so I don’t think we would have seen significantly greater remuneration had WFF not been introduced.

        • felix 5.1.1.1

          Yep, no question something was needed.

          I do wonder if it might be more elegant – if we do have to subsidise employers to employ people – to just raise the minimum wage and subsidise employers directly pay it.

          Call it what it is, you know?

          • Lanthanide 5.1.1.1.1

            The biggest share of the WFF pie goes to families who are on more than the minimum wage. So just raising the minimum wage won’t target the same people that WFF does.

            • Draco T Bastard 5.1.1.1.1.1

              /agreed

              Raising the minimum wage won’t actually get rid of poverty. For that we need a Universal Income. Once we admit that people need a minimum just to live and that part of societies job is to ensure that everyone has that minimum then we should be able to eliminate poverty.

  6. Here is the question that should be on anyones lips today and until the election:

    Is John Key profiting from NZ’s foreign debt? The answer is not simple but if the banks collapse and most especially Bank of America John Key loses most of his wealth. the only way he can keep it is if the world borrows more fiat valueless money. That is a huge conflict of interest!

    Penny Bright asked and this is what she got!

    http://www.youtube.com/watch?v=VXwNoaOpDMw

    • One Anonymous Bloke 6.1

      No it isn’t. Anyone with skin in the game can make money out of a falling market, just as there’s money to be made in a rising market. He makes money either way.

      • KJT 6.1.1

        Key will be rewarded, whatever the outcome for New Zealand, so long as he delivers our assets to the thieves, as intended.

      • travellerev 6.1.2

        The system of money as debt is collapsing. It’s unsustainable, parasitic and John Key knows it and he still borrows and spends because if he doesn’t he loses all. The loss is inevitable and the collapse of the banking system too. The only sensible way for NZ to move forward is to get rid of the central banking system and to start printing our own money again.

        • Draco T Bastard 6.1.2.1

          It’s not so much the central banking system as the fractional reserve system. Central banking is what we actually need – the money printed directly by the government rather than the private banks.

          • travellerev 6.1.2.1.1

            What I meant was the reserve banking system being a separate and privately owned banking monopoly and parasitic in nature and yes we should start printing our own money again as I said before and get rid of factional banking and the reserve bank system.

  7. Darren 7

    Maybe off topic, but….

    I just heard Bill English on RNZ say that

    Improving performance in the economy will worsen our trade deficit (or something), because the profits will be taken out of the country by foreign owners. He said we needed to get the companies back into NZ ownership.

    While at the same time they are planning to sell NZ owned assets.

    WTF?

    I’m confused. Have I got something wrong here?

    • Blighty 7.1

      no, he has.

    • marsman 7.2

      @ Darren. I heard it too. An admission that foreign ownership of NZ corporations is not good for NZ from the man who wants to hand over our State Assets to foreign corporations?

    • Dv 7.3

      YeaH i heard that too. Also said the buying of Z was o good as it kept the assetts in nz.
      Z was bought by Infratill aAND the superfund.

      I thought i had misheard.

      • mik e 7.3.1

        Dumb idea to buy Z because oil is running out and their will be less customers not unexpected though from from Dipstick!His track record continues to get worse

        • Lanthanide 7.3.1.1

          As the price of oil goes up, the volume sold will decrease. As the volume decreases, they’ll have to get a higher margin on what they sell to make a profit, which will nudge the price up a bit further.

          But if there’s a substantial drop in volume due to very high oil prices, they also won’t need as many staff or stations to meet the reduced demand and so will be able to close some. I guess a small issue might be disposal and cleanup of the sites, but I think the government would kindly intervene (amongst the general turmoil) and give them a pass to not have to do that cleanup work.

          NZ is going to be heavily reliant on petrol for transportation for the next decade, and realistically probably for the next 2 and maybe even 3. No doubt they’ll have tough trading times ahead, but the petrol business has a lot of life left in it yet. And being NZ-owned and operated efficiently (apparently Shell was managing some of their back-office stuff using shared excel spreadsheets) they may be able to pick up significant market share from the other businesses in the sector. They could easily grow profits in a shrinking market.

          • Colonial Viper 7.3.1.1.1

            And being NZ-owned and operated efficiently (apparently Shell was managing some of their back-office stuff using shared excel spreadsheets) they may be able to pick up significant market share from the other businesses in the sector. They could easily grow profits in a shrinking market.

            Petrol retail is at the wrong end of the value chain. No real money to be made here, only scraps. The majors have already taken all the profit, from the well onwards.

            They’ll make more selling a litre of milk to a passing driver than a tankful of petrol.

            As the price of oil goes up, the volume sold will decrease. As the volume decreases, they’ll have to get a higher margin on what they sell to make a profit, which will nudge the price up a bit further.

            And everytime they try and compensate for reduced sales volumes by inching prices up higher, the higher prices will end up destroying even more sales.

            Inflationary collapse.

            NZ is going to be heavily reliant on petrol for transportation for the next decade, and realistically probably for the next 2 and maybe even 3.

            Agree with you on 1 and possibly 2 decades but it won’t make it to 3 decades, as it will be heavily bicycle power by then.

    • mik e 7.4

      wheres QSF and tighty almiighty I would have thought they would be defending dipstick and catastrophe cat man key

    • He most cerytainly did say that: http://www.radionz.co.nz/news/political/87321/govt-refuses-responsibility-for-credit-downgrades

      Which is also why our BoP is so cruddy. The remittance of profits from privatised state assets is bleeding us of profits and pushing us further into deficit.

      A prime example of why asset sales are a short term gain only.

      Eg;

      Sell Asset X for $10 million.

      Result: $10 million flows into the country.

      First year nett profits remitted to overseas investors: $500,000

      2nd year; $1,000,000

      3rd year; $2,000,000

      4th year; $1,000,000

      5th year; $2,000,000

      6th year; $3,000,000

      7th year; $1,000,000

      Amount remitted overseas in seven years; $10,500,000.

      We’ve just lost the initial $10 million gain, and will now start losing money, affecting our Balance of Payments.

      That’s pretty much what English was saying.

      What’s remarkable is that a Tory has finally admitted why State asset or farm sales is not a terribly bright idea.

  8. Fermionic Interference 8

    Rob

    Einsteins definition of stupidity:

    Doing the same thing over and over again
    and expecting a different result.

  9. Dotty 9

    “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?”

    Hickey has written about the structural deficit before, as has Brian Easton (hardly a RWNJ):
    http://www.eastonbh.ac.nz/?p=952
    (Unfortunately his graph is not reproduced on his site – it shows the steady rise of government spending.)

    Between 2005 and 2008 the government committed new spending which flows through into subsequent years – not only without sufficient new income flows to cover it, but a reduction in income due to tax cuts. That’s why it is structural debt, not cyclical or seasonal. It is structured into normal ongoing revenue and expenditure. This expenditure includes Hickey’s “middle class welfare” of WFF extensions and interest free student loans. It also includes the growth in superannuation payments as more people retire (but the retirement age is not increased or entitlements reduced) and increased commitments in health policy.

    Running a cyclical deficit – to help off-set a recession – is very different to a structural deficit, because the latter persist even when the economy recovers and grows.

    This is not to say we shouldn’t have that new spending – but if you do, you have to cover the cost. And the increased spending started under Labour, as did the tax cuts. (From memory there was a tax cut in 2008.) National has exacerbated the situation with tax cuts, without cutting spending by enough to resolve the structural debt issue. (This is entirely separate from the current global financial meltdown or the previous property bubble.)

    I was kinda surprised (but pleased) when WFF changed and I qualified in 2007. Surprised because I’m not poor and can afford to support my family on my income. I think it is the extension of WFF to families like mine that need re- examining, not WFF for those on very low incomes. I have a colleague whose household income is over $200,000 and they get 20 hours free childcare for their 4 year old. This is “middle class welfare” – it contributes to, rather than reduces, inequality.

    • Draco T Bastard 9.1

      (From memory there was a tax cut in 2008.)

      There was but, IIRC, Labour were already talking about cancelling it before the election. They were certainly talking about doing another budget in December to take account of the GFC.

      …without cutting spending by enough to resolve the structural debt issue.

      Structural debt needs to be addressed by increasing income and not by cutting spending.

      I have a colleague whose household income is over $200,000 and they get 20 hours free childcare for their 4 year old. This is “middle class welfare” – it contributes to, rather than reduces, inequality.

      Actually, no it’s not. All childcare should be free no matter how much the parents earn as it’s improves the child’s socialisation. In other words, it’s good for society.

      • Dotty 9.1.1

        They’re both in the fulltime paid work force so the kid goes to daycare no matter who pays.

        Just now it’s free – i.e. paid for by taxpayer – giving them a bit of extra money each week for their hobby of property speculation.

        Far better that money goes where it is needed IMHO. Like my WFF, which I’m happy not to receive (happy to receive it too – thanks taxpayers!)

    • mik e 9.2

      They were tax cuts to middle class families who missed out under the birch english years

    • Afewknowthetruth 9.3

      Dotty

      ‘ 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’

      You will hear a lot about the symptoms but little about the causes.

      Global oil extraction peaked over 2005-2006 and soon afterwards demand exceeded supply. In 2008 the global economy was still operating at close to full speed and lack of oil supply in combination with speculation pushed oil to $147. That effectively demolished the global economy. The price collapse that accompanied demand destruction allowed for a faux recovery, which has now gone belly up. Most western nations import huge amounts of energy and consumer goods they cannot pay for -NZ included.

      We are moving towards the end of the industrial age and no amount of jigging with interest rates or tax rates, no amount of so-called stimulation will have any effect.

      For the whole story you’ll need to read the book.

  10. Adrian 10

    Darren, yeah that was amazing. What an admission by English. But once I thought about it I realised that this is the way English operates, he’s trying to insulate himself and by undermining Key, setting himself up to take over after they get an arsekicking on Nov26. He’s going to blame Key for the whole asset sales farce and claim he never liked the idea. Remember the Nats are doing a lot deeper polling than anyone else can afford, and they are scared about what the are finding out.

  11. Bored 11

    Dont worry be happy……Jokeys smiley photo ops will overcome the hard light of day, nicely intoned sound clips will reassure us that black is white…

    Fekk if we vote for him its proof we fully deserve the debt slavery he will leave us in, to be robbed blind and left penniless…we look more like fools who pay to be whipped by the dominatrix.

  12. Richard 12

    Wonder how this would work in NZ

    http://www.youtube.com/watch?v=qYtNwmXKIvM&feature=related

    “Campaign video by Richard Curtis and Bill Nighy, about the Robin Hood Tax, a tiny tax on bank transactions that could raise hundreds of billions for public services and to tackle poverty and climate change at home and around the world. Add your own voice to the campaign at http://www.robinhoodtax.org.uk

    • McFlock 12.1

      AKA a financial transaction tax, or as the business roundtable prefer to call it “the sky is falling! the sky is falling!”
        
      Bloody good idea. Currently Alliance policy, I think the Greens, too?
       

  13. Interesting…

    On RADIO NZ today;

    “”With the greatest respect, I’m not responsible for what happens in Europe and the United States, nor technically was I in government when there was the enormous build-up in private sector debt.”

    Instead, Mr Key says an increase in private sector debt when Labour was government has helped contribute to the downgrade.” – http://www.radionz.co.nz/news/political/87321/govt-refuses-responsibility-for-credit-downgrades

    Yet, back in May 2009, he said,

    “If I just look at our debt track and I compare that to the OECD debt track for other countries for 2012/2013 year, we have got a substantially lower debt exposure than most other countries,” – http://www.guide2.co.nz/politics/news/key-says-budget-will-avert-credit-downgrade/11/7730

    Sprung!

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