New Zealand budget 2009: Is there a cost from a downgrade?

I have noticed only two extreme positions in the media about a downgrade:

  1. It will be terrible – it will cost the govt alone $600m pa
  2. It doesn’t mean much – the credit ratings are “dis-credited”

Let me tell you something – the truth is inbetween.

Treasury’s estimate of the cost of a credit downgrade are based on the downgrade to Ireland.  As we are already facing a fairly high price for the globe underlying belief of our risk, and as it is unlikely we will be knocked down and put on negative watch AGAIN (like Ireland was), the cost will not be this heavy.

However, there is a cost!  It would lead to higher interest rates, restrict access to international credit, and prevent some possible capital investment from overseas.  It doesn’t matter that the credit rating agencies didn’t pick the subprime crisis – investors still stick to their recommendations for what is going on in the little backwater parts of the world (like NZ).

As a result, I wish Labour would shut up about this being a “budget to satisfy S&P rather than to help people”.  If they don’t I wish National would respond by saying that they are trying to stop interest rates going up – which would hurt people, instead of saying that it is “their budget”.

  • Andrew Coleman

    At the risk of sounding like a ten-year long broken record*, perhaps while we are worrying about the potential interest cost of a credit downgrade, we could think of the interest cost we have being paying for the last decade and a half by having our own currency. Our nominal and real interest rates have exceeded Australia’s by an average of 1 percent for at least a decade, which is costing New Zealanders at least $1.5 billion dollars in net terms, given our external debt. $1.5 billion a year is an awful lot to pay for the privilege of having Sir Edmund and Sir Ernest on our notes…… or else, we must believe that the incremental value of using 2, The Terrace rather than 65 Martin Place to stabilise the economy is worth more than $1.5 billion a year, a proposition that must be at least worthy of serious debate.

    * A flat,black disc with two grooves that used to be used to store and replay music.

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