KEY POINTS:
New Zealand's banks must refinance a massive amount of offshore funding over the next three months which may affect the Government's credit rating given its new wholesale bank funding guarantee, international ratings agency Fitch says.
The agency last week affirmed the Crown's strong "AA" long term local currency credit rating with a stable outlook.
However Fitch analyst Ai Ling Ngiam said that strength, which largely stems from the Government's sound fiscal position, "will certainly be tested in the midst of the liquidity crunch in international credit markets and the synchronised global economic downturn".
A "hard landing" for New Zealand was becoming "more probable" based on the rapid deterioration in global credit conditions, an adverse terms-of-trade shock for commodity exporters and a steep housing market correction that was already affecting consumption, said Ngiam.
On the plus side, years of Government surpluses had left New Zealand "well-placed to weather the economic downturn".
However Ngiam said New Zealand's reliance on extensive foreign borrowing to finance its large current account deficits meant disruptions to capital inflows posed a considerable risk to liquidity conditions within the domestic financial system.
"That, in turn, could increase sovereign credit risk as a result of the contingent sovereign liability associated with the banking sector."
The Government in October unveiled a wholesale funding guarantee scheme, regarded as necessary to ensure local banks could continue to raise money on offshore markets they rely on for about a third, or at present around $120 billion, of their funding.
Despite some recent signs of thawing, offshore markets remain badly disrupted by the credit crunch.
Ngiam also points out that "a sizeable portion" of banks' short-term funding requirements were falling due in the short term "in an environment of heightened global risk aversion".
Should New Zealand's sovereign credit rating be downgraded, borrowing costs for the Government would rise.
