Tag Archives: Credit Rating Agencies

New Zealand’s Credit Rating – downgrade?

I did an earlier posting on Credit Rating Agencies explaining who they are and how they work. The table right (from the Parliamentary Monthly Economic Review) shows the three credit rating agencies and the current rating that New Zealand has as an economy.

It wasn’t until 1977 the New Zealand was actually rated by S&P and Moddy’s – Fitch came into the picture in 2002. You can see from the table that S&P reviewed New Zealand in November 2010 and while maintaining its rating at AA+, they changed the outlook from stale to negative. Fitch also gave NZ the same rating. This means that there is a higher chance of a downgrading which would mean higher interest costs to the government.

Standard and Poor’s raised concerns around the level of New Zealand’s external imbalances, and the weakening of fiscal flexibility for their change in outlook. The
negative outlook on Fitch Ratings’ credit rating for New Zealand is also based on the economy’s imbalances, with the level of the country’s current account deficit and international debt being mentioned.

Following the Christchurch earthquake in February 2011, Moody’s Investor Services made an announcement that they saw no reason to reconsider their Aaa credit rating for New Zealand, although they noted that it would likely “result in another one-time rise in government debt”. The credit rating agency noted that New Zealand government debt levels were below the median for other Aaa-rated governments globally. The Agency stated that it would wait for a fuller assessment of the impact on government debt, when the 2011 Budget is presented.

What does this mean for New Zealand?
The 2011 budget will no doubt assure credit rating agencies that a downgrade is unnecessary and therefore Bill English will provide little fiscal stimulus. In a pre-budget presentation English hinted at $1 billion of new spending mainly in health and education, but this will be “substantially offset” by cuts in other, lower priority, areas.

Economics in 2010 – DRINKBONDS, ALKIBONDS and PUKEBONDS

Here is something I got which was doing the rounds on email – very amusing.
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I was asked to explain the Economic crisis in Ireland here is an example
as I understand it….( passed on of course !!)

Mary is the proprietor of a bar in Dublin . She realises that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronise her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around about Mary’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Mary’s bar. Soon she has the largest sales volume for any bar in Dublin. By providing her customers’ freedom from immediate payment demands, Mary gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Mary’s gross sales volume increases massively. A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Mary’s borrowing limit. He sees no reason for any undue concern, since he has the debts of unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Mary’s bar. He so informs Mary. Mary then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Mary cannot fulfil her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community. The suppliers of Mary’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion euro no-strings attached cash infusion from their cronies in Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Mary’s bar.

Now, do you understand economics in 2010?

NZ$ falls with S&P rating and Korean clash

The NZ$ dropped to its lowest level for 4 weeks against the US$ – now at US$0.76 from a high of US$0.79. Two main reasons for this:

1. New Zealand has the second-highest possible rating, AA+, but Standard & Poors (credit rating agency) has revised its outlook from stable to negative – one-in-three chance that NZ will be downgraded. It is New Zealand’s external position that is the main issue – kiwis borrow more than other kiwis are willing to lend. Net international liabilities of the country (as distinct from the Government) at the end of June were $164 billion. S&P said it seemed likely that as the economy strengthened, the problem of big deficits and ever-rising overseas debt would return, “and possibly with a vengeance”. This information for foreign currency dealers means that there is more risk attached to holding NZ$’s therefore you tend to see a sell-off on the market – supply curve to the right = price drops.

2. The clash between North and South Korea has brought about instability in the area and also made investors risk averse to regional currencies including the Aus$. Most of them have returned to the relative safety of American and Japanese bonds or even the US$. With the turmoil in Ireland and the concern that the rescue package from the IMF and the EU won’t be enough investors are tucking for cover. Additionally other countries with high levels of debt, in particular Portugal and Spain, may also have to seek financial help.

NZ debt – the good news and the bad news

Despite a glowing report from the IMF which stated that New Zealand has the second smallest government debt among 23 developed countries, credit rating agency Standard and Poor’s (S&P) has indicated that the overall level of debt has the country vulnerable. Treasury estimate govenment debt to be 27% of GDP by 2015 but this compares to total net debt at 90% of GDP with much of this in the private sector.
Their concern is that if there is a major budget crisis in other countries this could make markets nervous about investing in high debt economies – both government and private debt. New Zealand is borrowing up to $240 millilon dollars a week and if the former were to happen interest charges on that borowing would go up (maybe a downgrade by credit rating agencies) which ultimately would effect growth in the economy and the NZ$. S&P suggest that there is a need to rely less on foreign funds and generate more export revenue especially from the Asian markets. The balancing act is making sure that debt as a % of GDP doesn’t get too high but at the same time generating growth in the economy. Click here for Brian Fallow’s column in the NZ Hearld.

Credit Rating Agencies

A credit rating agency evaluates the credit worthiness of an individual, corporation, or even a country. The credit rating that they receive is considered from the financial past and current assets and liabilities. Naturally, a credit rating informs a lender or investor the prospect of the subject being able to pay back a loan. The credit rating of a corporation is a financial pointer to possible investors of debt securities such as bonds. These are assigned by credit rating agencies such as Standard & Poor’s, Moody’s or Fitch.

When the word ‘superpower’ is mentioned one thinks of the United States and more recently China. However in the financial world the credit rating agency Moody’s seems to have fallen under this banner. Along with its rivals Standard & Poor and Fitch, Moody’s exert significant pressure in the financial markets. Since these agencies assess risk they are the semi-official forecasters of how all the big companies and indeed governments will perform. Subsequently it is not surprising that the rating agencies have been criticised for their role in the recent credit crisis.