KEY POINTS:
New Zealand's credit rating could become hostage to those of the Australian banks, Standard and Poor's warned yesterday.
The Australian banks are "relevant" because of their ownership of the major New Zealand banks, which in turn fund the country's large overseas financing needs.
Standard and Poor's, and its fellow rating agency Moody's, have in the past two weeks both revised the outlook for National Australia Bank, parent of the Bank of New Zealand, from stable to negative.
What links the Government's credit rating to that of the Australian banks is the economy's heavy reliance on imported credit, largely intermediated by the banks.
Standard and Poor's yesterday reaffirmed New Zealand's AA+ sovereign rating, with stable outlook, which it has held since 2001.
The rating has a bearing on the cost of borrowing not only for the Government but for private sector borrowers as well.
Standard and Poor's expects tax cuts and Government spending increases to lead to "modest" fiscal deficits over the next few years.
But the strategy of building up financial assets and paying down debt had left the Government in a net credit position, it said.
And it expects ongoing fiscal discipline to remain the norm even if there is a change of government in the coming election.
However the agency repeated warnings that the country's current account deficits - which it expects to remain over 7 per cent of GDP over the next few years - and high level of overseas debt make the economy vulnerable to external shocks and leave it with external financing needs among the highest of any country Standard and Poor's rates.
While the New Zealand banking system was very reliant on non-resident funding, it remained profitable, adequately capitalised and had good asset quality by international standards, it said.
But New Zealand's sovereign rating would be at risk in the unlikely event that the problems in the finance company sector, which are not systemically important, were to affect the banking sector.
"The ongoing credit quality of the major Australian banks will also be relevant to the New Zealand sovereign ratings, given their ownership of the major New Zealand banks, which in turn fund New Zealand's external financing needs," Standard and Poor's said.
Both it and Moody's revised NAB's outlook to negative since the bank disclosed on July 25 that it was making A$830 million ($1050 million) in provisions for exposure to collateralised debt obligations, a form of security which has become notorious since the sub-prime crisis erupted last year.
ANZ also increased its provisioning, by A$1.2 billion, but escaped with its rating unscathed.
Finance Minister Michael Cullen said the unchanged rating was a vote of confidence in New Zealand in challenging international times.
"Everyone knows that these past 12 months have seen considerable pressures develop in international credit markets in the wake of the sub-prime mortgage crisis in the United States," he said.
"It is vital for the well-being of all New Zealanders that their governments maintain investors' confidence in New Zealand with policies such as encouraging a stronger personal savings culture, by maintaining the strong financial position of the Crown itself and by ongoing steps to strengthen our capital markets."
REPORT CARD FROM STANDARD AND POOR'S
* Standard and Poor's yesterday reaffirmed New Zealand's AA+ sovereign rating, with stable outlook.
* The rating affects the cost of borrowing not only for the Government but for private sector borrowers as well.
* Standard and Poor's warns the country's high current account deficits and level of overseas debt make the economy vulnerable to external shocks.
