Bernard Hickey: Fat cats egg us on to throw our cheddar down debt hole

Most of our foreign debt is generated by households, who are heavily indebted at more than 140 per cent of disposable income. Photo / Thinkstock

An old proverb states: when the cat's away, the mice will play. Right now, New Zealanders are the mice and the financial market is the cat - and it is definitely away with the fairies, letting the mice run amok.

The grown-ups of the financial markets should be keeping the pressure on us to stop selling our assets, increasing foreign debts and spending more than we earn.

Our net foreign liabilities are still about 70 per cent of gross domestic product. That's down from as much as 80 per cent before the global financial crisis, but it's still higher than most experts think is comfortable and is not that much lower than the debts of Portugal, Ireland, Greece, Spain and Iceland.

That debt remains high because New Zealanders spend much more than we earn. Treasury forecasts our current account deficit will worsen to 6.5 per cent of GDP by 2016-17, from 4.7 per cent this year.

In previous years, a deficit over 6 per cent was a big warning sign to the cats. Instead, they are egging us on to spend and borrow more because they have been anaesthetised by promises of huge injections of freshly printed money in the United States, Europe, Britain and Japan. They are also relaxed because our government debt is so low, at less than 30 per cent of GDP.

Most of our foreign debt is generated by households, who are heavily indebted at more than 140 per cent of disposable income. That's down from more than 150 per cent in early 2008, but is still well above the 110 per cent seen in the US. Connected to that is short-term foreign debt, equivalent to 50 per cent of GDP, which is higher than for Ireland, Spain, Britain and Australia.

We know these sorts of current account deficits, combined with high short-term debts, make us vulnerable. So why are we getting away with this? Firstly, we have a flexible currency and most of our foreign debt is denominated or hedged in NZ dollars. Secondly, we still have plenty left to sell and plenty of borrowing capacity.

Our Government could borrow more without hitting the limits because investors are ageing and becoming risk-averse, which means they love buying our government bonds.

The best measure of how far away the cats are is our currency, which is at near record highs and a big signal to keep spending, borrowing and selling assets.

We could just have a big party, importing lots of cars and flat-screen TVs. Or the Government could borrow to go on a spending spree or cut taxes.

Or we, as mice, could use this time when the cats are away to rebuild our nests in a safer place. That means using the high NZ dollar to import new equipment or services to become more efficient and productive.

From a government point of view, that could mean borrowing heavily while interest rates are low to improve our infrastructure so we can improve our growth rate and get wealthier. That's how to play while the cats are away.