The credit rating bogeyman

Written By: - Date published: 9:04 am, May 26th, 2009 - 24 comments
Categories: budget 2009 - Tags:

It’s pretty clear how Key and English plan to spin their budget. They will use the bogeyman of a credit rating downgrade to justify doing what they want to do cutting contributions to the Superannuation fund and spending on core services like health and education. They’ll attempt to overshadow the cuts by making some spending announcements to probably (hopefully, finally) something to protect jobs like the Greens’ housing insulation plan and some ‘new’ health programmes that comes out of the existing $750 million baseline increase.

My question is whether this credit rating downgrade threat is all it’s made out to be. First off, these credit ratings companies are the same ones who screwed up royally by assigning good ratings to the subprime mortgage debt so does anyone still listen to them?

Anyway, only one of the big three, S&P, has said there is any threat of our rating being downgraded. In fact, S&P isn’t that worried. All we have to do is get back into operating surplus within five years, which will happen in the boom that follows the recession (as long as we don’t do stupid things like cut taxes).

Moody’s thinks our government books are better placed to handle the recession than the US and UK.


The comparison is always made to Ireland, which was downgraded in March but we are no Ireland. We were lucky enough to have a government during the boom times that didn’t slash taxes as if the good times would last forever. Now, our debt might reach 45% of GDP by 2013 (don’t worry about projections further out than that, they’re meaningless) but Ireland’s will go past 70%, increasing at about twice the rate of our debt.

Finally, check out this the ‘yield spread’ (difference in interest rates) on Irish and German debt.


The gap (which represents extra cost of borrowing to the Irish Government) increased before the credit downgrade. Serious lenders don’t react to downgrades they react beforehand to the information the ratings agencies base their decisions on. Actually, the gap has actually got smaller since the downgrade.

We’re not going to get a downgrade from the discredited credit agencies and it wouldn’t be the disaster it’s cracked up to be even if it were to happen.

My next post will look at the minimum the government needs to do to maintain existing public services but one final thought on credit ratings.

Ultimately, what the ratings agencies want to know is that we are serious about keeping our finances healthy in the long-term. Our government is considering stopping payments to the Superannuation Fund, a fund which is making huge returns and means we won’t have to increase taxes in the future to pay for superannuation. Now, do you think that’s going to strike those big shot financiers as savvy fiscal policy?
-Marty G

24 comments on “The credit rating bogeyman”

  1. Rich 1

    I’m thinking that Eurozone debt might be a bit different. It’s feasable (if very unlikely) that the Irish might not default, but might instead reinvent the Punt and unilaterally convert its debt from Euros to Punt? Which wouldn’t be a total default, but would be a problem for the bondholders.

    I’m assuming that that’s a credit risk, not a currency risk.

    Whereas the NZ dollar currency risk is the main thing that drives the NZ governments cost of borrowing, not the credit risk of the government. That’s largely driven by private borrowing.

  2. Zaphod Beeblebrox 2

    It our private borrowing thats the problem. Key and English would be better off looking at ways to stop borrowing for non productive purposes like holiday baches and ponzi schemes.

  3. aj 3

    How big does the ‘boom in 5yrs’ have to be to move the government’s books back into surplus. Will growth averaging just 1.5% 2010 through to 2015 do this?

  4. burt 4

    Marty G

    Now, do you think that’s going to strike those big shot financiers as savvy fiscal policy?

    Not many people think borrowing to invest is a smart thing. Can you explain why it is a good thing ?

    • felix 4.1

      But people and businesses borrow to invest all the time – as long as the return on investment is greater than the cost of borrowing.

      Why is this a problem?

      • burt 4.1.1

        “as long as the return on investment is greater than the cost of borrowing”.

        Yep, you got it in one felix. The borrowing you use as a reference is not usually used to invest into a deposit scheme but used to finance business activity, asset creation etc.

        But hey, if it’s assured that investing in the Cullen fund will give better returns than the cost of borrowing why did we pay of debt rather than simply pump up the volume on pouring money into the Cullen fund ?

      • burt 4.1.2


        So which way do you want it to be are you going to call me an idiot because I suggest that borrowing to invest is a stupid thing or are you going to call Cullen an idiot because he choose to pay off debt rather than increase investment in the Cullen fund via increased borrowing?

        You can’t have it both ways felix. I bet you wished you had thought this one through before you let your standard MO of “take contrary position to burt’ guide your hapless fingers on your keyboard.

        • felix

          I wasn’t calling you an idiot and I don’t know enough about this subject to suggest that you’re wrong.

          I was responding to your question which was “Can you explain why [borrowing to invest] is a good thing ?”

          I think my response was a fair one but I’m happy to be corrected.

  5. Pascal's bookie 5

    “Not many people think borrowing to invest is a smart thing.”

    While I know what you mean, taken as it stands that’s pretty funny. What with leverage and bond markets and such.

  6. Jared 6

    You are underestimating our reliance on a positive credit outlook. At a lunch last week, the CFO of the BNZ estimated a credit downgrade was worth 500 Million a year to the Government, and at least 150 Million a year to Banks considering our reliance on offshore financing (around 130 Billion Dollars).
    You may dislike the S&P, but they are a formidable player in the ratings market.

  7. In terms of spin, one of the best to come out of the Standard (and yes, it appears to be a universal view) is the following:

    We were lucky enough to have a government during the boom times that didn’t slash taxes as if the good times would last forever.

    Rather than offer tax cuts (or indeed deal with underlying tax issues), the past Government increased taxes and allow tax creep to do the same to fund a massive increase in State funding no doubt ensuring its ongoing popularity.

    These were not one off projects but structural increases in spending. No wonder he couldn’t afford tax cuts.

    • Zaphod Beeblebrox 7.1

      Would you have preferred that the didn’t save the surplus? The spending was mainly due to Working for Families and abolishing interest for student loans, two things National still see as worthy I assume as they have said they are maintaining.
      The biggest crime of the previous government was not reining in private borrowing, something neither major party had anything serious to say about.

  8. Pat 8

    I think Key and English are showing smart management in the handling of Standard & Poors. Getting them onside and bringing them into the circle, so to speak, goes a long way to getting their buy-in that we are OK, and has the effect of humanising our fiscal management.

    Whatever the budget says is going to be attacked on this site. But I think a good outcome will be if the government are able to maintain our credit rating and maintain core social service levels at the same time.

    • Zaphod Beeblebrox 8.1

      Agreed, they are unlikely to do any major harm with their approach. Its how well they set us up for the future that is of interest now.
      Re-prioritizing and cutting the crap is important, its how they structure the tax and welfare system in the future that will be really important.

      • burt 8.1.1

        If they structure tax/welfare based on sound economic models rather than election winning formula then that will be a good start.

      • Bill 8.1.2

        So Key and English (small fish) swim over to S&P ( big mamma of rapacious reptiles) for a wee chat.

        Should go down well.

  9. infused 9

    There is going to be no boom after this recession. You’re kidding yourself. Feel free to quote me in future. It’s going to a very gradual exit.

    • Zaphod Beeblebrox 9.1

      Nor should there be. Hopefully growth will be based on activities other speculation, property and borrowing. The high flying property gurus may not like this, but hopefully and farmers and scientists will.

  10. The Baron 10

    Oh here we go again – more fruity statistics from the numbers retard.

    Have a look at GDP per capita between us and Ireland. Those growth friendly taxation policies that you find oh-so-evil helped to create a society that is simply far better off than NZ’s – (go wolfram:

    Look at the size of that gap! Sure, they have some rough times right now, but the recession will have to get a hell of a lot worse before they crash back down to the level that Labour has left us at.

    Plus they used that wealth to create a society that I thought you lefty whiners would just j*zz all over – free education, generous benefits and public health care. All paid for with a rich and prosperous economy, grown in part by taxation friendly policies.

    Leave the ideology at the door and recognise that Helen/Cullen did little but play with the economic drapes during their time in the big office, and that we squandered a great opportunity to build an economy that could have given more of what we all wanted.

    • lprent 10.1

      Of course it would help your argument if someone towed NZ next to a continential market. But otherwise your argument has zero validity. The circumstances between the two countries are totally dissimilar.

    • Ag 10.2

      Ireland also had Forbairt or whatever it is called now. That is not something that NZ righties look on with any favour IIRC

  11. r0b 11

    Leave the ideology at the door and recognise that Helen/Cullen did little but play with the economic drapes during their time in the big office,

    Oh BS. The Labour government paid off debt, redistributed wealth (WFF), set up massively important infrastructure and investment for the future (Cullen fund, Kiwisaver), and left the economy well placed as this crisis began.

    and that we squandered a great opportunity to build an economy that could have given more of what we all wanted.

    We grew faster than comparable economies over the same time. There is no magic bullet, there is no substitute for hard work and gradual employment. Those that think that there is a shortcut start making pretend money out of thin air – it looks like they’re getting rich quick in the short term, but then the wheels fall off. Those artificially inflated economies are well in the poo now, and being bailed out with trillions of taxpayer dollars. Thank goodness we had prudent government and a rational economy.

    • Zaphod Beeblebrox 11.1

      And we still have one of the lowest unemployment rates in the world and as the above table shows one of the lowest govt debts. Thanks a lot Cullen!

      What did Labour ever give us? Apart from all that.
      The aqueduct?

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