Bernard Hickey: Back to an AA+

Terry Serepisos has lived more than most. File photo / Mark Mitchell

What was a bigger blow last week? Dan Carter's torn groin tendon or the double downgrade of New Zealand's credit rating?

Judging by the talkback airtime, headlines and vox pops, most people were more worried about Carter's loss than the downgrade by Fitch and Standard and Poor's of New Zealand's sovereign rating to AA from AA+.

The subdued market reaction seemed to reinforce the sense that maybe it didn't matter too much.

Treasury's warning in 2009 that a credit rating downgrade would increase borrowing rates by 1.5 per cent is not playing out this time. Does that mean we have nothing to worry about? Do we need a AA+ credit rating?

It could be argued the downgrade was anticipated by markets and the sell-off has already happened.

Markets drove the NZ dollar down from US88c in early August to US78c by the time of the downgrade.

Credit default swap spreads for Australasian corporates, which means the Australasian banks, rose more than 1 per cent or 100 basis points to over 200 basis, which is as high as at the worst of the Lehman Bros crisis.

There is not much pressure now for the banks to increase floating mortgage rates without an official cash rate to go with it. But if the crisis extends into next year, those costs will hit our pockets. So what would we need to do to recover an AA+ rating?

Finance Minister Bill English said New Zealand would need to run sustained current account surpluses and spend less than it earned. It would have to stop borrowing overseas and selling assets to foreigners.

We would have to change habits and economic structures that have encouraged us to run current account deficits for 40 years.

The Reserve Bank is looking at making it more difficult for banks to fund themselves on "hot" overseas money. The Government has edged towards making it harder to sell land to foreign investors.

But unless we also turn off the consumption and borrowing tap we face higher borrowing costs and slower growth.