Euro collapse could tip NZ into recession

The New Zealand economy could be headed for another recession if Europe's worsening debt crisis sparks a collapse in the euro, experts say.

The projection comes amid a disastrous week for Europe after ratings agency Standard & Poor's cut the credit ratings of nine European nations, complicating Europe's efforts to find a way out of its debt crisis.

Standard and Poor's cut France and Austria's AAA rating by one notch to AA+, scaled back its long-term ratings on Cyprus, Italy, Portugal and Spain by two notches and its ratings for Malta, Slovakia and Slovenia by one notch.

The downgrades, which were foreshadowed last year, could escalate Europe's financial crisis by increasing borrowing costs for nations already struggling with heavy debt burdens.

Massey University banking specialist David Tripe says that may have a significant impact on New Zealand's economy, with there only being a 'vague possibility' that New Zealand would escape a recession if the euro collapsed.

"Reduced European demand for Chinese exports, reduced European demand for exports from various other countries as well but particularly if we look at China and south-east Asia, those are important markets,'' he said.

"That would push the exchange rate against the US dollar down, that would have an impact on increasing the relative prices of our exports and imports of course most notably oil.''

National Bank senior economist Sharon Zollner said there was no doubt Europe was heading for a recession, and how New Zealand fared would be largely down to how other major economies outside of Europe reacted.

"Can the US soldier on while Europe collapses? Can China soldier on? Europe is China's biggest export market and they are getting very concerned about the outlook for their exports.

"They have traditionally had an export driven model. Last time they filled the gap with a massive investment drive, but they have a limited capacity to do that again. They in their own way have spent their ammunition."

Zollner said the New Zealand economy was so far proving resilient as diversified export markets and long-term structural factors influencing global food demand provided a buffer against the European 'slow train wreck'.

Immediate market response to the downgrades was relatively muted today although there was a kneejerk reaction in the currency markets.

The New Zealand dollar recently traded at 62.62 euro cents up from 61.23 cents on Friday.

It is expected to break through last week's record high of 62.76 cents, according to four out of the five analysts in a BusinessDesk survey.

The kiwi may trade in a range of 61.50 euro cents and 63.50 cents this week, they say.

- with agencies and Newstalk ZB