Being small with big debts makes NZ easy target for rating agencies

Standard & Poor's threat to downgrade New Zealand's AA+ credit rating, and the Government's supplication to the United States company in giving it a look at today's Budget before the media and the public, is hard to swallow.

After all S&P and other big credit ratings agencies, including Fitch and Moody's, had a hand in creating the sub-prime crisis and the recession that has forced the Government into this fiscal bind.

They awarded AAA ratings to bundles of sub-prime mortgages which have proved to be anything but safe investments. Critics also point to the AAA rating Enron carried until a few weeks of its collapse and the agencies' failure to spot the dot com crash.

While their assessments haven't been sharp at times, at other times their business practices have.

There have been reports of agencies producing unfavourable and unsolicited credit ratings for companies that chose not to use their services.

In an ideal world the agencies would be impartial in their assessments but recent history suggests they can be influenced by commercial imperatives and their business model means there are potential conflicts of interest.

New Zealand is not the only one questioning the agencies' influence and mandate.

Last month after S&P and Fitch cut Ireland's AAA rating, comments from S&P led to accusations the agency was being overly prescriptive about the Irish Government's fiscal management.

S&P managing director David Bears wrote a letter of apology to Irish Finance Minister Brian Lenihan in which he said his company took "a strictly neutral stance on the policies of the 125 sovereign Governments for which we have credit ratings".

That sounds disingenuous given that a downgrade is bad news and the agency will often, as it did this week in New Zealand, comment on what it would like to see in order that countries can avoid that fate.

Moreover, the agency was sounding something less than "strictly neutral" when analyst Kyran Curry told the Herald this week: "[National] has a strong history of fiscal conservatism, and we believe it will stick to its knitting and do what is needed to stabilise its fiscal position."

New Zealand is not the only country staring down the barrel of a downgrade. Commentators have pointed out that Britain and the US face some of the same critical issues as the likes of Ireland, yet the rhetoric from the agencies towards them is far less aggressive.

Unfortunately, it appears because we are a small economy with big debts we are easier to push around than a big economy with big debts.

The more cynical observers suggest the agencies may be looking to restore some of their damaged credibility by getting tough with easy targets.