US debt downgrade reflects 'blatant abuse' of its global position

File photo / NZ Herald

The US sovereign debt downgrade to AA+ from AAA reflects credit rating agency Standard & Poor's view that the world's largest economy is "blatantly abusing" its privileged position as the world's reserve currency, says Andrew Bascand, head of Wellington-based funds manager Harbour Asset Management Ltd.

Bascand's special commentary on the downgrade coincides with a fresh release from S&P this afternoon singling out New Zealand as being vulnerable to ratings downgrades because of the US downgrade.

While S&P says the downgrade should have no necessary impact on the credit ratings of other Asia-Pacific nations, it says New Zealand, Japan and Vietnam are not included in those countries having "generally stable outlooks", predicts a worse impact on exporting countries from a slower world economy, and renewed pressure on countries running large Budget deficits.

While most Asia-Pacific governments would be expected to prop up their economies by using their national balance sheets, some "continue to bear the scars of the recent downturn."

"The fiscal capacities of Japan, India, Malaysia, Taiwan and New Zealand have shrunk relative to pre-2008 levels," S&P said.

"If a renewed slowdown comes, it would likely create a deeper and more prolonged impact than the last one," with more negative implications for creditworthiness than previous experienced.

"A larger number of negative rating actions would follow," S&P said. "We wait and see."

Countries with financial systems highly reliant on offshore market funding could suffer reduced liquidity, including New Zealand, among other Asia-Pacific nations such as Pakistan, Sri Lanka, Australia, Korea, and Indonesia.

S&P is not yet saying it expects prolonged global financial market turmoil from both the US and European debt problems.

It is operating on a "baseline assumption of no likely abrupt dislocations in developed economies' financial and real economies."

"However, given the inter-connectivity of the global markets, an unexpectedly sharp disruption in developed world financial markets could ... lead the U.S. and European economies into deep contraction again, or further delay their recoveries."

In his analysis, Bascand says the US debt ceiling political crisis was a "red herring", with the potential for slow American and European growth the real driver of the last few days' falls in stocks, bonds and global currencies.

In theory, the US should not have been downgraded, since it issues only US dollar-denominated debt and can "print money" if the need arises to pay it off. As the world's current reserve currency, the world has also been a natural holder of US debt.

"We think the S&P rating decision reflects an opinion that they now view the US to be blatantly abusing that privileged position," said Bascand.

Saturday's S&P downgrade announcement was particularly critical of the role of the Republican Party majority in the US Congress for its role in the debt ceiling crisis.

"We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues," the S&P statement said.

Meanwhile, ASB Bank economist Christina Leung, says world financial markets are in for a "volatile 72 hours" as the implications of both U.S. and European events are digested.

While the ASB still expects the Reserve Bank of New Zealand to raise the Official Cash Rate by 50 basis points to 3% next month, "risks have grown over the past week that the RBNZ will delay that hike."

Bascand predicts that if the US Federal Reserve is forced over coming months to run looser monetary policy, it's possible that will help maintain the US dollar value of commodity prices, which have been underpinning a stronger outlook for the New Zealand economy.

Harbour Asset says it remains attracted to New Zealand equities, has shunned exposure to banking stocks, and is overweight in the domestic healthcare and resources sectors.