NZ faces closer debt scrutiny

The Government could face rising costs of borrowing and increased scrutiny of its debt as a result of the sovereign debt crisis in Europe, a global fund manager has warned.

Gerard Fitzpatrick, a bond portfolio manager for Russell Investments, said Europe's €750 billion ($1.3 trillion) bailout had stopped the immediate liquidity crisis but there were still concerns about sovereign debt.

"The market responded positively to the bailout but once the dust settled people realised that while the liquidity crisis had been resolved there was still the issue of sovereign debt which left long-term questions."

Fitzpatrick, who is in New Zealand this week to talk to local investors in his bond fund, said governments faced closer scrutiny of their budget deficits.

"The financial markets will be analysing this much more closely. The likes of New Zealand and Australia are still on the radar. But the metrics here are a lot better."

However, he said there was a risk of debt being repriced which could make it more expensive for the Government here to borrow money internationally.

"That will put more pressure on the New Zealand budget."

Just like the cuts the private sector made during the global financial crisis, governments would also be under pressure to cut back, he said.

"That could be a driver behind less government spending."

Fitzpatrick said Europe's debt crisis was not as bad as the global financial crisis and the world was also in a much better place now.

"A lot of investors have deleveraged and regulations have been tightened. The housing boom is effectively over. So we are starting off a lower base."

But there was still the potential for there to be a domino effect which could result in lower global growth.

"Portugal, Ireland, Greece and Spain will be the first focus. But it is likely to spread outside of that. Any signs of individual countries being slow to make cutbacks could see a sell off of their sovereign debt."

Fitzpatrick said there was also more potential for sovereign rating downgrades.

Government debt rating downgrades had been unlikely but now it appeared that the "gloves were off" when it came to rating agencies.

Fitzpatrick said the New Zealand Government needed to manage its debt as actively as possible.

"Financial markets are increasingly selling off areas that are weak. The lack of diversity of the New Zealand economy could also pose some challenges."

Fitzpatrick said Europe was on a "rocky road" to recovery and the bailout had given it up to two years of breathing room.

It would be up to individual countries to work through debt issues during that time.