Savings Group says private debt leaves economy 'vulnerable'

The Government's Savings Working Group has added its voice to ratings agency Standard & Poor's warning that New Zealand households' debt mountain leaves the economy vulnerable to further international shocks.

Standard & Poor's on Monday put the country on notice of a possible downgrade to its credit rating - which would be likely to raise interest rates across the board - unless it reduced its reliance on imported savings.

Kerry McDonald, chairman of the Savings Working Group appointed by the Government this year to investigate New Zealand's savings shortage, said Standard & Poor's warning was consistent with his own group's concerns.

The former chairman of the Bank of New Zealand, McDonald said the group had highlighted the fact that much of the increase in private debt in recent years had fed a bubble in house and farm prices.

As a result, the economy was in a "vulnerable and unsustainable position" and "corrective measures were likely to be challenging".

Standard & Poor's this week said it was mindful that while growth in New Zealand's foreign debt - as measured by the current account deficit - had improved in the last year or two, as the economy strengthened, the problem of big deficits and ever-rising overseas debt would return, "and possibly with a vengeance".

McDonald agreed: "The problem is the economy starts to recover and we go back down the path we were heading down previously."

Labour leader Phil Goff said Prime Minister John Key and his Government must take responsibility for the situation.

"The very first thing this Government did was to cut KiwiSaver and to cut the Cullen Fund, and what the credit agency has said is that this country is not saving enough."

The Government was now at a loss as to how to turn the situation around.

"It has no plan and that's reflected in that credit downgrade," he said.

However, McDonald didn't believe things would have been much different if KiwiSaver and Cullen Fund contributions had been maintained at their previous levels.

The Savings Working Group is due to report its findings in late January.

Finance Minister Bill English said he was puzzled by Standard & Poor's decision given New Zealand was actually in a better position than 12 months ago when the outlook rating was lifted.

English said the Government was focused on reducing external debt and increasing savings.

"I think what's happened is because of the Irish bailout - the financial markets where we borrow billions of dollars a year are more sensitive to how much debt countries have and New Zealand has one of the highest rates of external debt in the developed world."

- Additional reporting: NZPA