Credit outlook cut but it’s not a credit rating downgrade

Written By: - Date published: 3:00 am, July 17th, 2009 - 48 comments
Categories: economy - Tags:

So, Fitch, the third of the big three sovereign credit ratings agencies, has moved the Government’s rating from a stable outlook to a negative outlook.

Does this mean that John Key will be admitting that he has delivered a credit downgrade, like he was boasting of an upgrade when S&P (another of the big 3) moved us from negative to stable?

Does this mean that journalists will be reporting that we have received “an effective downgrade”

  • Because, Vernon Small, you used that terminology – “an effective upgrade” – to describe the outcome of the Budget in yesterday’s Independent. In fact, right after the Budget you were just called it an “upgrade“. Will you be calling this a downgrade?
  • Audrey Young. It was an “upgrade” on May 29. You’ll be writing about the “downgrade” now, yes? No, I doubt it.
  • John Armstrong. You wrote of an “unexpected upgrading” on May 29. Will you be writing about an “unexpected downgrade” now?

You’re just the ones I could find easily. Nearly every journo repeated this Nat spin about an upgrade. Logically, they must report a downgrade now.

merelyWhat’s the bet the journos don’t mention it or try to say (on the basis of nothing) that Fitch doesn’t count, only S&P does?

The fact of the matter (and I know it’s annoying those things get involved) is that a change in rating outlook is not a change in rating – it is not an upgrade or downgrade, it is an indicator of the possibility of a future upgrade or downgrade. Furthermore, a ratings agency changing its rating for a country does not automatically change the cost of borrowing for that country – it is merely more information for the market, which has usually predicted it.

Is this outlook change unwelcome? Yes, and unexpected. The dollar fell on the announcement. Does it mean we’re going to be facing a higher cost of borrowing in the future? Unlikely. Is it a credit downgrade? No, no, and, one more time, no. It’s no more a downgrade than S&P moving us from negative to stable in May was an upgrade.

Of course, The Standard has been trying to get these simple facts through to the media all along. I’m deluding myself to think they’ll suddenly listen. Except, oh right, before they were getting it wrong in a way that favoured National. If they get it right now, the Nats don’t look so bad.

[Update: Watkins does the trifecta – Fitch is “a less influential rating agency than some” (print version only), it only “revised” our “outlook”, but S&P still “upgraded” us in May.]

48 comments on “Credit outlook cut but it’s not a credit rating downgrade”

  1. Pascal's bookie 1

    I’m guessing it’ll be ‘who’s Fitch’ for the main part, with a dose of ‘no longer relevant’ (the focus of the earlier stories was about finding an ‘objective’ way to score the budget), and yeah, it’s annoying, but that’s media narratives for ya.

    (edit: Tracy Watkins was pretty solid in the Dom this am, made explicit ref to the post budget coverage etc)

    dum-te-do, S&P, ratings, so forth, creditable respectable dudes, ding ding, bell ringing, why hellooo trouble

    I poked around with some law firms in California, and started to pick up the rumor that California Public Employees’ Retirement System (CALPERS) was going to drop the bomb on S&P, Moody’s and Fitch. No one would say anything on the record, but it was clear that litigation was being considered as an option against the Ratings Agencies….

    … If I was a Rating Agency lawyer, I would be very, very nervous . . .

    Some of the additional details:

    – Conflicts of interest by the rating agencies are rife. They are paid by the companies issuing the securities — an arrangement that prevents the agencies from issuing negative ratings;

    – Structured investment vehicles generated lucrative fees for rating agencies, above and beyond normal fees. They were paid as consultants who helped structure the deals — not as neutral 3rd parties. The fees ranged from $300,000 to $500,000 and up to $1 million for each deal;

    -These fees were in addition to revenue generated by the agencies for their more traditional work of issuing credit ratings;

    -By actively creating these instruments, CALPERS owed a different duty of care as an underwriter, not merely a 3rd party firm protected by 1st Amendment Free Speech;

    -By then rating them AAA, what the Ratings Agencies did amounted to Fraud.

  2. Marty G 2

    incredible. Watkins writes

    “New Zealand being placed on negative creditwatch”

    and in the same article:

    “one of the biggest ratings agencies, Standard & Poor’s, awarding an upgrade.”

    she explicitly avoids calling what happened yesterday a downgrade but still says that the opposite was an upgrade. She even disses Fitch by calling S&P the big one, implying Fitch’s opinion doesn’t matter as much.

    Just as I predicted. God, I wish it wasn’t so easy.

    • ghostwhowalks 2.1

      The cluelessness abounds.
      Espiner says in his blog that the Chief Justice will be ‘quietly replaced’ next year for speaking out on sentencing!.
      He really should give up his day job if this is the sort of nonsense he believes. ( there was hell for Pakistan when they tried it)

      • snoozer 2.1.1

        That would be an outrage if it were to happen. The Law Society would be in the streets.

        • ghostwhowalks

          Espiner compounds this ‘replacement’ nonsense by claiming in his blog in a reply to his original lines that the previous CJ were about 10 years each ( I think he got this from looking up Wikipedia) so therefore Elias has been there since 1999 her ‘term’ must be almost up.
          The ignorance is breathtaking, but who is surprised

  3. StephenR 3

    In light of this potential downgrade, does this make those in opposition look a tad reckless when they call for more borrowing and spending?

  4. Maynard J 4

    Nat Rad called in a downgrade, I believe 😮

    StephenR, perhaps. What about those tax cuts we are borrowing for? You know, something that actually happened – does that make them actually reckless?

    • cocamc 4.1

      Maynard – what tax cuts did we borrow for?

      • Pete 4.1.1

        …right cocamc, I always forget that too, we borrow for spending on infrastructure, not tax cuts *whew*.

        Hope that sets everyone straight…

      • snoozer 4.1.2


        If we hadn’t had the October and April tax cuts, we wouldn’t need to be borrowing $2.5 billion this year.

        Therefore, we are having to borrow to pay for those tax cuts.

        • cocamc

          The April tax custs were funded by changes to Kiwisaver so cost neutral. So we actually had to borrow for Labour’s tax cuts

          • snoozer

            No. If there hadn’t been tax cuts, we won’t be borrowing the money. Simple as that.

            Go on then cocamc. Call for the Governemnt to reverse both the Labour and National tax cuts.

            • cocamc

              If Nationals tax cuts were cost neutral then we didn’t borrow for them. Simple mathematics Snoozer. If they cancel those tax cuts then reinstate the Kiwisaver position, again cost neutral.

            • snoozer

              But those are two seperate actions, cocamc. Something is revenue neutral when it in itself generates revenue to cover its costs.

              If we simply cancelled the April 1 tax cuts, that would give us a billion more in revenue and, so, save us a billion a year in borrowing. Therefore, we are borrowing $1 billion a year to pay for them.

              It’s true that to reinstate Kiwisaver would require more borrowing but that’s a seperate choice from the tax cuts.

    • candy man 4.2

      hence the reason the next two cuts have been postponed until they are affordable.

      Thats the key word everyone should always consider when discussing tax cuts, spending, investment, borrowing…AFFORDABLE

  5. Good post Marty, points out the media hypocrisy quite clearly.

    • So Bored 5.1

      Its not just the media hypocrisy, the whole rating system is severely warped. We need to keep reminding the media and politicians that S & P, Moodys etc blithely carried on BAU without raising a single dischordant note whilst we ran full speed into a market crash. Their credibility is zero.

      • jarbury 5.1.1

        That is very true. Unfortunately the financial markets seem to think they still have some credibility so a change in ratings will make a difference.

        • Daveski

          I actually have some agreement with these sentiments. I agree the credibility is close to zero given what happened. However, pragmatically, if (i stress IF) there is a downgrade, it will have a real impact not just on the Govt but also on individuals, particularly those who can least afford it.

          It does again also question the credibility of those who were demanding we borrow more and hope. IN this light, doing nothing (or not knowing what to do) is still better than borrowing.

          • jarbury

            I thought it was high-levels of private debt that Fitch were far more worried about than public debt levels?

            I am sure I remember listening to a Radio NZ interview with the head of Fitch a few weeks ago, where he said something along the lines of that.

        • So Bored

          Another train wreck to follow, love to see the headlines then, perhaps “Business journalist shot by deranged bankrupt”…….

  6. What Fitch said this am was that if the high levels of private debt remained, then the only solution was for the Govt to increase its level of savings ie decrease expenditure.

    So yes you are right about the problem but it it the proposed solution that is the biggest worry for everyone.

    • jarbury 6.1

      Shouldn’t the solution be efforts to reduce private debt? You know, find ways to fix the actual problem?

      • snoozer 6.1.1

        Yeah. How about if the Government were to encourage workers to save?

        Hmm, getting Kiwis to save more.. what could they call that?

        If only those tools hadn’t gutted Kiwisaver to pay for those tax-cuts they cancelled.

      • Daveski 6.1.2

        Agreed but that is long term and Fitch is interested in short term. I’m no economist but the problem I think is NZ’s fixation with housing which is long term debt and largely borrowed from overseas. Hence, there is no quick fix. It would be less of an issue if we were financing debt from internal sources but we’re not.

        Bernard Hickey proposed 10 ways of addressing these problems but I doubt they’ll be implemented. No one wants the problems we have yet we’re not prepared to look at the solutions either.

        • snoozer

          Totally right, Daveski. Over-investment (with borrowed money) in housing, rather than in productive capital is one of our country’s major problems.

          • Daveski

            Snoozer – let’s call a truce? I’m not into flame wars but equally I’m not into being called a borderline racist either.

            • jarbury

              Comes back to my call for government to get involved in increasing housing supply so that it can become more affordable compared to our average income levels.

              And a capital gains tax would make sense too I suppose.

        • ghostwhowalks

          Since when did Bernard Hickey go past carrying the big banks water on any financial matter.
          Im not really sure what his financial expertise is, unless having a website that compares interest rates and previously being online Editor for Xtra MSN
          makes the cut these days

    • Zaphod Beeblebrox 6.2

      What they said makes no sense at all. Private debt is causing the problem. Even though NZ has almost te lowest govt debt in the world, the solution proposed was to reduce the govt debt even further.
      If you want to imrove improve private savings, surely the govt should be trying to stimulate growth, wages and try to do something about unemployment. Then they could change the tax system to decrease speculative profits.
      My guess is that the govt’s action will make things worse not better.
      The man from Fitch’s didn’t want to talk about that though.

  7. THis from the story about the Calpers lawsuit against The credit rating agencies.

    All the bonds were given the gold-plated AAA credit rating, yet all three SIVs collapsed amid the market turmoil of 2007 and 2008.

    The agencies ‘gave the SIVs purchased by Calpers their highest credit ratings, and by doing so made negligent misrepresentation,’ the fund’s lawsuit says. ‘The credit ratings on the three SIVs ultimately proved to be wildly inaccurate and unreasonably high.’

    From AAA to collapse! How can that be.

    wildly inaccurate isnt the half of it.
    But of course those in Fitch will say that it ‘was a different office’ not our problem

    • Pat 7.1

      Jarbury – increasing the housing supply doesn’t increase personal savings though, does it. In fact it increases personal debt.

      If we want a savings culture like Europe then we need to stop bleating on about housing affordability, as though home ownership should be within reach for everyone and the measure of success.

      Instead the housing supply should be focused on provision of quality affordable rental properties. Despite a rigid RMA and consent process, NZ has been dismal at this. The focus should be on properties that you would be happy to live in for your entire working life – something in which you can raise a family in dignity. This requires both government and private investor involvement.

      A renting and saving culture should be promoted as a legitimate life choice as opposed to the 30 year mortgage path.

      And the trouble with the home ownership path is that no-one keeps their house for 30 years and pays it off. In Auckland the average time people stay in the same home is 4 years, and each time they change houses they get another 30 year mortgage.

      • jarbury 7.1.1

        I actually agree with you there Pat – that we need to get away from our obsession with home ownership. I don’t own my home and I don’t intend to for quite some time. This is largely because I want to live in a nice part of the city rather than out in the wops – so renting works for me.

        Maybe we need to look at the Singapore model where the government owns most of the housing and rents it out at market rates. One way or another Auckland needs a lot more houses over the next decade or two – or housing affordability (renting or buying) will decrease dramatically. And I don’t think the private sector can provide that extra housing in a sustainable manner (ie. through intensification rather than sprawl).

      • Draco T Bastard 7.1.2

        Government supply of rental properties would be good. Keep the private investors out of it – they’re the ones that caused the housing bubble.

      • Who do you think owns the rental properties ? Santa Claus.
        The ‘investment property’ owners are the ones they produce the speculative bubbles as the go for the untaxed capital gains

        • jarbury

          Exactly GWW. Greater government involvement in the housing sector would reduce the impact of speculative investment property owners.

          A capital gains tax does sound somewhat necessary.

          • Daveski

            Agreed entirely. As it stands, the prick tax is also part of the problem as it encouraged investors to look for ways of minimising tax. You don’t have that if you have relativity between company, trust and personal tax rates.

            • Draco T Bastard

              Cut company tax to 0% but have it so that all profit is given out as dividends before reinvestment. Abolish trusts.

              There you go – a large chunk of tax dodging eliminated.

  8. BLiP 8

    The auditors and credit agencies are part of the problem, not the solution. Fuck em all.

    • So Bored 8.1

      Said that earlier, you are 100% onto it.

      • BLiP 8.1.1

        Yes, saw that and thought I would have my two cents worth anyway. Doesn’t hurt to repeat it, of course. ‘Scuse my ignorance – what’s BAU?

        • Daveski

          Business as Usual

          Next time we disagree, I’ll remember you fessed up to ignorance 😉

          Enjoy your weekend all

  9. RedLogix 9

    Is it just me, or is the timing of all this just too cute?

    Recall how the Herald went ultra-septic on Cullen after he pursued them on a massive tax dodging rort?

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